The Mini-Budget

29 September 2022

The Mini-Budget

Hard and soft.

By John Watson

Photo of John Watson

Like boiled eggs, disagreements as to political policy come in two varieties: hard and soft. The hard decisions are essentially scientific. Will a policy have the desired consequences? Yes or no? Will the mini-budget revive the economy or stoke inflation? Will a supply of weaponry to the Ukraine lead to peace or a nuclear war? Here the questions are about what consequences will follow particular actions and it matters not a jot why those who decide on the actions decide as they do. Effect will follow cause according to the remorseless laws of science and one can no more resist those laws than Canute could push back the waves.

The second type of disagreement concerns preferences. Would one rather have more freedom at the expense of less of a social safety net, for example? Is too much power concentrated in the hands of the wealthy, for another? Would we like to see the Church of England being disestablished? Should we have to wear hats on Sunday? You can have endless disagreements about these points but here the answer is not governed by science but rather by preference. It is perfectly possible to have a society where wealth is concentrated. It is also possible to have one where it is spread fairly equally. Both are viable.

The debate over the mini-budget has confused these types of disagreement, with commentators sliding between the hard questions of whether the various tax cuts will revive the economy without stoking inflation and the soft questions of whether the measures are fair across the population (for example between rich and poor) as if they were interchangeable. In fact they are not and, the country being in a poor economic state and there being little room for the luxury of preference, it is the hard questions which must come first. Will Mr Kwarteng’s mini-budget do what it says on the tin – i.e. boost the economy without unacceptable inflationary or indebtedness consequences – or will it not? That is a question of hard economics and if it will not, no appeal to the shades of Margaret Thatcher will save it from being a disaster. If on the other hand it does, then concerns that the rich benefit disproportionately will be drowned in the tide of popular relief.

It is a question of science then, not a preference, but that does not mean that public attitudes to the Chancellor’s measures should be disregarded. A policy which would be jolly good apart from the fact that it causes a general strike which paralyses the economy completely is useless simply because it does not work. To founder by misreading popular opinion is every bit as incompetent as to founder because of failure to predict the behaviour of the markets.

Luck too must inevitably take its part. The economic theory behind the policies does not operate in vacuo and the consequences which flow must depends upon the facts to which that theory is applied. A settlement in the Ukraine accompanied by a drop in fuel prices, for example, could give the economy a shot in the arm dwarfing the effects of its fiscal policies.

For those who, like the writer, are not economists, the judgement as to whether the Chancellor’s Proposals will or will not succeed is hard to make. One cannot help but be discouraged at the consensus of economic commentators who believe that the policy line being taken is flawed or at least far too risky. These include the Institute of Fiscal Studies and Capital Economics, both well respected for their expertise, and of course the market itself which has delivered an enormous thumbs down by a sell-off of sterling. At a lower level they include a number of Conservative MPs who refer to the proposals as being “a huge bet”, in many cases while being unsure what they mean by that. Commentators are not necessarily right, of course, even when there is a consensus. The abolition of exchange controls in 1979 did not result in the widely predicted collapse of sterling, but then rebooting the economy by tax cuts was tried by Anthony Barber in 1972 and resulted in disastrous overheating. Obviously the Government must take the view that in his day the circumstances were fundamentally different.

The thing about hard decisions is that there really is an outcome and that it will become apparent relatively soon; so if we cannot predict whether Kwarteng’s measures will fail we can at least consider what the consequences of such a failure would be. The central debate is not about persons but about political principles. If lower taxes and regulations do not deliver growth, the theoretical thinking which underpins the right wing of the Conservative party will collapse, leaving the field open for Sir Keir Starmer and his friends on the moderate left. That would mean the Tories being out of power for many many years, not because the electorate is particularly vengeful but, with the centre of their philosophy blown away, it would take a long time to create a political approach which stood any chance of winning a general election. Truss and Kwarteng then are not just gambling with the inflation rate. They are gambling the existence of their party and the future direction of Britain.

Meanwhile we are all watching from the wings and trying to draw conclusions from the straws in the wind. As we do so, however, we need to distinguish carefully between the hard issue of whether the Government’s economic policy will work and the soft issues of whether it is fair. Those commentators who were outraged at the drop in the top rate of tax from 45% to 40% on the grounds that it favours the rich miss the point. They should be looking at the effect on the hard issues. If the consequence is to boost GDP, it is making a useful contribution on the question that matters. If it does not do so, we are not getting value for the consequential increase in debt and the chances of the Chancellor’s policies proving an overall success are consequentially reduced.

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