Is Liz Truss right about the “economic establishment”?

UK Treasury: Picture by Carlos Delgado, CC BY-SA 3.0,

Last weekend former British prime minister Liz Truss reentered the public sphere with an essay in the Sunday Telegraph, and an interview with The Spectator, publications that are both relatively sympathetic to her cause. This has occasioned much derision in the wider media. While I share much of this derisive view of her, I’m not going to join the chorus – it’s been said too well by others. Ms Truss has simply reminded most people why they dislike her so much. I want talk about the issues she raises, both in terms of economic policy, and how it can be implemented in Britain’s institutional environment.

Ms Truss’s starting point is what is widely seen as the UK’s dismal economic performance since the great financial crisis of 2008-09. Economic growth has been dismal, and if Britain has been able to maintain the pre-crisis trend of growth, then, according to Tim Harford in the Financial Times, it would be a staggering 40% better off. She attributes this to policy mistakes – a view that seems to be widely shared, even if not many agree on what those mistakes were. Personally, I differ from this – I think that the lack of growth is a reflection of adverse economic conditions, which started before the crisis – principally demographics and a changed world trade environment, made worse by Britain’s lack of a strong manufacturing industry. Liz Truss’s solution is to go back to policies popularised by the US president Ronald Reagan in the 1980s, and often attributed to Britain’s Margaret Thatcher too, though in fact she was much more cautious. These are mainly a matter of tax cuts, especially for businesses and the well-off, and deregulation. What she particularly favours is to proceed with tax cuts without regard to short-term effects on the public budget deficit, in the belief that an expanding economy will make things good in the longer run. She was always reluctant to talk about cutting public spending, and in the case of defence, advocated a substantial increase.

Her views on tax are largely magical thinking. Tax cuts might directly stimulate growth by increasing demand, but not as efficiently as many other policies, such as more generous state benefits, and not at a time when inflation is running riot. Lower corporate taxes might attract inward investment – but they are not widely thought to be a major factor, especially when the country’s politics seem so unstable. To her credit, though, apart from tax cuts, she advocated supply-side reforms that stand a much better change of promoting growth. These included easing immigration rules and making it easier for parents of small children to reenter the labour market. These weren’t popular in her own party, though. In her speech to the Conservative Party conference she decried an anti-growth coalition – which it struck many observers as being mostly her own party. However, her supply-side ideas had nothing like the heft to make more than a small difference to the country’s growth rate. Tax cuts (or forgoing tax increases) were her only big idea.

She has a second huge blind spot: inflation. She does not appear to understand that this usually arises from excess economic demand – and therefore that taming it requires deliberately crimping economic growth. She persistently seemed to think that inflation was somebody else’s problem – in particular the Bank of England’s. I find it astonishing that somebody whose degree course included economics (PPE at Oxford) can have thought this way. Everything interacts with everything else, and if you are the head of government, you are ultimately responsible for all the tools of macroeconomic management. What individuals do with their personal time may not be government’s problem; what public institutions do most assuredly is, even if they are run at arms length.

But amid all this foolishness and and failure to understand how things actually work, she did touch on something that is true. She railed against the “economic establishment” (the Sunday Telegraph unhelpfully added “left-wing” to this in their headline, but she neither said that nor meant it). She was particularly vehement about Treasury orthodoxy, which she saw at first hand in two years as a Treasury minister. The power of this orthodoxy undermines, usually fatally, any attempt to implement policy that contradicts it. That included her fiscal policies. They didn’t have her back when things got rough, and they forced an about-turn on most of them. What is a bit less clear is how Ms Truss fits the people controlling the world’s financial markets into this orthodoxy. She and her supporters are trying to blame the derivative based policies used by many pension funds for creating an unstable situation, about which nobody warned her or her Chancellor, Kwasi Kwateng. The Bank of England, also part of the orthodoxy, should have handled this better, they suggest. Rather interestingly, when she describes these polices as allowing the funds to invest more in businesses rather than bonds, they sound like just the sort of pro-growth idea she should be supporting. Of course the real problem here was the imperious arrogance with which she and Mr Kwateng treated financial markets. And as for the Bank of England, it was widely known that it was struggling to manage markets because inflation had caused a reversal of its loose-money policies, especially Quantitative Easing, upon which markets had come to depend..

I have some radical economic ideas of my own, though quite unlike Ms Truss’s. These are that Britain is far too centralised, and that responsibility for the many trade-offs required in financial and wider policy need to be radically decentralised. It’s not surprising that people oppose housing or industrial investments in their local area, when they will not be accountable for the benefits. The tough decisions are made in Whitehall, leaving with nothing else to do but complain. But this is part of the Treasury orthodoxy too – they don’t want a chaotic decentralisation, with corrupt nobodies taking decisions without the Treasury having ultimate sign-off. When the government wanted to distribute funding for its “Levelling Up” agenda, it didn’t distribute funds for disposal by the city regions and councils, it made these institutions put in bids for the imperious mandarins to pick from. To be fair, government leaders seem a bit embarrassed about this, and say there will be changes in future. But how did they allow this in the first place? And what credibility do their promises to do things differently next time have? The Treasury will undermine any effort they make to reform things. It is now reported that the Treasury is refusing to authorise any capital projects proposed by the Department for Levelling Up. The Treasury isn’t all in the wrong here: the levelling up funding was originally envisioned by former prime minister Boris Johnson as a politically directed slush fund to help win marginal constituencies. The power of the orthodoxy is that it is often right.

So the “economic establishment” would undermine my ideas for reform just as surely as they did Ms Truss’s. It’s a real thing. Any serious attempt at political reform therefore has to take on the orthodoxy and beat it. It can be done. Mrs Thatcher did it, and, to some extent, so did Tony Blair and Gordon Brown for Labour in the early 2000s, especially with their radical expansion of health funding (and it required both of the double-act to do it). It took these leaders years and all their political skill. The remarkable thing about Liz Truss is that she thought she could break the Treasury in an afternoon, based on a mandate she had won from 100,000 or Conservative Party members.

And that is the point. We need political leaders who understand the orthodoxies and how to challenge them – people with political skills high and low. The current government possess few, if any, people of that description. Do Labour? I really don’t know. I haven’t been that impressed with Sir Keir Starmer, their leader, or Rachel Reeves, his Shadow Chancellor. But I could be wrong – they are becoming more effective. One opposition politician I am sure has the necessary heft and skill is the Liberal Democrat leader Ed Davey, having honed those skills as energy minister in the coalition government of 2010-2015. Perhaps he will get another chance.

5 thoughts on “Is Liz Truss right about the “economic establishment”?”

  1. Dear Matthew. We have met a couple of times and I read your posts. This time I was especially interested in the last few paragraphs. I live in Somerset and I’m very interested in decentralisation. It started as a little blog I write for my village. Is there a body or party with some serious thinking to connect with? I’m aware of recent articles in the FT and Economist which talk about this but where else to go? You mention Ed Davey. What are the LibDems saying about all this? Are you aware of bodies or pressure group so doing some serious thinking? David

    1. Hi David. Decentralisation has been a central plank of Lib Dem policy from its formation, inherited from the Liberals. I’m not sure what the current specifics of policy are – at one time local income tax was one of the more prominent polices during the general election (in 2001 or 2005), but the party has since backed off making a fuss about it. The party’s strength in local government gave force to this. In coalition Nick Clegg made some headway in developing city regions, but advances in local government empowerment were neutered by the Tories, especially the strict controls over council tax. Tax-raising powers are a central to the idea – and a good test of whether a party is serious. Labour are moving in the right direction, but I don’t think they are truly serious yet. I think the Greens are strong supporters though.
      I’m not sure who has done any heavy lifting with regard to policy proposals. Matthew

      1. Thank you Matthew, yes. I’m sure tax-raising is central to any significant change. I’ll see what the greens have to say first, I think.

  2. @ David @ Matthew,

    Decentralisation is one of those policies which sounds fine in principle but…….and there’s always a “but”!

    The potential drawback is that responsibilities will be devolved but the economic power to be able pay to fulfil them won’t be. Central government, in an economy like the UK’s, almost always has the ability to spend more than it receives in taxation. With just a couple of notable and short exceptions this has been happening as long as anyone can remember. It is usually referred to as Government borrowing but I would argue it isn’t borrowing at all in the conventional sense. Government is more like a bank which receives deposits from bond sales ,and other ways too, which it needs to spend into the economy to prevent too much recession. If needs must, as they did during the Pandemic, the Govt can also ‘borrow’ money from the BoE interest free to keep the national economy on an even keel. It shouldn’t overdo it and create too much inflation though.

    Devolved governments such as the ones we have in Wales and Scotland don’t have this same privilege. So they are reliant on whatever deal they can strike in advance with central government to support their spending. I suspect the Scots, via the Barnett formula, have a somewhat better deal than the Welsh in this respect.

    So by all means push for more devolution but don’t overlook the associated macroeconomics.

    1. There are plenty of problems with decentralisation. Indeed it is a bit worrying if it is presented as a panacea. And you correctly identify a particular problem. US states have a lot of freedoms but they are constrained by the need for balanced budgets.

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