Where Do You Go To My Lovely?

Long live Boris. Tantalising us plebeians with a reference to Lucius Quinctius Cincinnatus in his final speech (who left Rome for a solitary existence on his farm, only later to return to Caput Mundi and take charge as dictator), he rode off into the sunset. Enter a new Sheriff in town. The Right Honourable Liz Truss who once boasted as Foreign Secretary that "she'll be opening up new pork markets" in Beijing, wanted to change course. Britain will now be a low-tax, high-growth kinda place. This kind of admiration for free market, supply-side economics, and one must presume the works of Milton Friedman, George Stigler and F.A. Hayek has been absent since the Thatcher years. We can always enjoy having the State a bit more off our backs. That should apply both in economic and civil liberty, though the government has entirely forsaken the latter in its merciless bid to weaken fundamental protections of free expression and judicial review, hallmarks of the modern British State (but let's not worry about that right now). 

Naturally, the first act of any fiscally sound, individualist and free market-orientated administration should be an unprecedented intervention in the market, with punishingly costly subsidies. Hence, the first key policy of the Truss administration was to institute one of the most expensive government interventions in British history with an "Energy Price Guarantee". Bankrolled via massive government borrowing, just as gilt yields are rising, the State will expend (in all likelihood) north of £100,000,000,000 on subsidising the cost of energy for households and certain businesses. How about a targeted windfall tax on oil and gas companies to plug the gap? After all, the shocks to the global energy market were precipitated by Russia's invasion of Ukraine and Europe's addiction to Putin's oil and gas and the painful costs of abruptly cutting off that addiction. Why should fossil fuel companies enjoy staggering profits caused by unforeseen external circumstances (rather than their internal innovative and cutting-edge R&D and investment)? That is a question in search of an answer my dear boy! The Prime Minister, ever the keen-eyed economist, reminded us that "profit" is not a dirty word, and taxing profits discourages foreign direct investment. 

Thus, we'll have supply-side economics and a borrowing bonanza to fund State energy subsidies and shall place the burden exclusively on the taxpayer (or to be more precise, future taxpayers). I'm sure Mr Friedman and the entire Chicago school of economics would be proud of this brilliant chess move. After announcing this policy, and a mere two days after assuming the Premiership, the Queen died. I am not suggesting that the two events are causally related or even that the nation's longest reigning sovereign was so profoundly affected by the economic literacy of this government that she was so overwhelmed that she keeled over. Alas, after the official period of mourning, the Truss government was back to its economic mastery. The Chancellor of the Exchequer, a similarly-minded acolyte, stood up in the hallowed chamber of the House of Commons, to extoll the virtues of his Growth Plan (which included more details on the free market £100+ billion energy subsidies). It was not styled as a budget or a budget-lite to avoid the pesky number-crunching and assessment by the Office of Budget Responsibility. When you plan to kickstart a flagging economy, who has time for such nonsense? The Chancellor delivered a basket of tax cuts, the biggest since the budget of 1972. The most notable included: (a) cancellation of the planned increase in corporation tax from 19% to 25%; (b) reversal of the 1.25% increase in National Insurance; (c) abolition of the 45% additional income tax rate for earnings >£150k; (d) lowering the basic income tax from 20% to 19%. What impact would such substantial fiscal manoeuvres have on inflation? What additional tax revenue would be generated in the medium term to offset the tax cuts? How would the natural fall in tax revenues in the short term be offset? Drastic spending cuts on public services & welfare? More borrowing? We do not know - only the Chancellor's brilliant mind has these answers stored deep inside its cranium. He promised to update us on November 23rd with a fiscal statement. In the meantime, he and his boss are running for cover from any media scrutiny. If only they had the guts to balance some tax-cutting with substantial spending cuts, then they will have something to say that makes sense. But perhaps they have discovered the perfect trifecta: lower taxes, spending stability or increase, and continued borrowing. If they have made that breakthrough, they should immediately call the economies of Argentina, Greece, and heck call every hotline. Tell the IMF to spread the word too! 

As it turns out, the international markets did not respond so warmly. A run on the pound; an appreciation of sovereign gilt yields and a paralysed housing market with mortgage lenders suspending an array of products (due to the difficulty in gauging the trajectory and speed of rate increases by the Bank of England) were some of the initial "what the fuck, dude?" reactions. The only (almost) certain economic assessment is that we will soon be in a recession, and it will probably be longer and deeper than expected, as the spooked suits at Threadneedle Street will push for faster and steeper increases in interest rates. To quote a famous economist (the PM may or may not be aware of): "The first lesson of economics is scarcity. There is never enough of anything to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics." We cannot know whether the Truss folks have breached this "first lesson of politics" as they may not be fully aware of what they want to convey with their economic policy, apart from uncalculated chaos.