Comment

Kwarteng is right to ignore the howls of the commentariat and go for growth

For too long, our political class has analysed policy through two lenses: redistribution and optics - while ignoring what drives prosperity

he time is extremely limited before the next election, and the work is just beginning, but the focus is in the right direction Credit: BBC screengrab

Today’s fiscal event is totemic for this government and the country. It marks the beginning of a policy agenda relentlessly focused on growing the economy through tax cuts and cutting red tape. This stands in stark contrast to the way politics has been managed in recent years. The commentariat, and consequently much of the political class, has almost exclusively analysed policy through just two lenses: redistribution and optics. 

To start, every policy is put through a static economic model that highlights the immediate impact on different income quadrants. This is favoured by the likes of Torsten Bell of the Resolution Foundation, a former policy director for the Labour Party. These models eschew the dynamic effects of tax changes on growth (e.g. how cutting corporate taxes boosts investment, reducing income taxes incentives work). The implication is that if a policy fails to transfer money directly to lower income earners it must be rejected. 

This is presented as a dispassionate analysis but is in fact highly selective and political. Just take the National Insurance hike. Last September, the increase was criticised for squeezing low income workers, particularly the likes of nurses. Labour and the Liberal Democrats opposed the hike. Now we are being told that reversing the policy will help the richest households (who, by definition, pay much higher taxes and thus will benefit more from a reduction). The distributional consequences, not how higher taxes on employment discourage work, are the focus.

This is entirely the wrong lens in which to consider a policy announcement. It’s a declinist mindset, focused on deciding who gets which piece of the pie. The purpose of reducing taxes, or cutting regulations, is to encourage investment, increase productivity and enable higher incomes. This is about making the pie bigger, so everyone can receive a bigger piece. 

It’s the same principle for the government’s other announcements. The end of the bankers' bonus cap has been criticised for helping the top end of town. But this policy was always opposed by the UK government and the Bank of England. It has just meant higher fixed salaries while limiting the ability of banks to punish poor performers or reduce their outgoings in bad years. Ending the cap could mean attracting more dynamic businesses and highly paid bankers, boosting our growth and tax revenues.

Once they’re finished talking about the distributional consequences, the commentariat will go on to talk about optics. They will claim a policy is unpopular by pointing to a artfully-worded snap poll, a few angry tweets or an anonymous comment from a disgruntled backbencher. This demonstrates a lack of willingness, or perhaps intellectual ability, to assess the policy detail. It treats politics like a football game, to be won or lost, rather than a debate over competing visions and actions.

In any case, the momentary popularity of individual policies is not a true indication of electoral viability. In 2019, much of Jeremy Corbyn’s manifesto, from nationalising industries to ‘free’ broadband, appeared to score highly in the polls. But, taken together, people did not believe this ‘magic money tree’ socialist ideal would deliver prosperity. 

The totality of a manifesto and its vision is what ultimately matters. The Thatcher government demonstrated that it is possible to win popular support for controversial reform by being consistent, principled and clear about what is being done and why. Similarly, the Truss government could prove extremely successful by constructing and communicating a narrative around growth and delivering policies that will boost prosperity.

Over-regulation and poorly designed taxes make us less innovative, damage smaller and newer businesses, and ultimately reduce our productivity and incomes. Politically, it is never easy to cut down on unnecessary red tape or reform the tax system. There are inevitably vested interests who are willing to stir up trouble. But our prosperity, along with the government’s political fortunes, depends on the ability to deliver.

The time is extremely limited before the next election, and the work is just beginning, but the focus is in the right direction. The Chancellor has demonstrated this government will entirely reject the commentariat dogmas in favour of economic growth, reducing taxes and cutting red tape. This will show that Britain is open for business.

 

Matthew Lesh is the head of public policy at the Institute of Economic Affairs