21 September 2022

Leader: Liz Truss has misread the times

After years of austerity, voters are craving an active state but all the PM has to offer is free-market individualism.

There are times in a nation’s history when it becomes more than an imagined community. The period of mourning that followed the death of Queen Elizabeth II was one such moment. As hundreds of thousands of people queued for up to 24 hours to see the Queen lying in state in Westminster Hall in London, they experienced a rare sense of togetherness and solidarity. The qualities for which the Queen was admired by monarchists and republicans alike – civility, patience, common decency – were on full display in the Queue.

But this moment of unity cannot mask the reality that the United Kingdom is facing one of the most fraught periods in its postwar history. The economy is on the edge of recession, living standards are plummeting and public services are increasingly overwhelmed.

For these maladies, Liz Truss’s radical right-wing government has prescribed a clear remedy: rapid economic growth. Her administration has announced that it will freeze household energy bills for two years, reverse the rise in National Insurance that was implemented in April and cancel the planned increase in corporation tax, and it has hinted at removing the cap on bankers’ bonuses. The aim of these measures is to help meet the new target of 2.5 per cent annual GDP growth set by the Chancellor, Kwasi Kwarteng. Since the 2008 financial crisis, the UK economy has grown at an average annual rate of just 1.5 per cent (compared to 2.7 per cent before the crash). Of the G7 countries, only Italy has fared worse.

The UK’s anaemic performance has intensified the living standards crisis. As the Resolution Foundation, a think tank, has charted, by 2018 UK median disposable incomes were just 9 per cent higher than in 2005, compared with 40 per cent higher in Germany and 39.8 per cent in France. Slovenia and Poland are among the European countries now projected to record higher living standards than Britain this decade. To avoid this fate, the UK needs a larger economy.

We welcome the Truss administration’s decision to prioritise growth over a narrow fixation on deficit reduction. As Gerard Lyons, an economist close to the Prime Minister, writes, “this thinking wrongly led the [Cameron] government to opt for austerity a decade ago”. The UK, which enjoys a lender of last resort (the Bank of England) and can borrow in its own currency, has far greater fiscal freedom than eurozone members.

But while higher growth is the right aim, the Truss government’s means are more questionable. The UK’s greatest economic problem has been its dismal productivity growth (output per hour worked rose by just 0.7 per cent between 2009 and 2019). This reflects parlous levels of public and private investment, poor skills and training, and antiquated infrastructure. But rather than addressing this crisis, Ms Truss has prioritised expensive tax cuts.

We opposed the 1.25 point National Insurance rise on the grounds that it penalised low-income workers – a wealth tax would have been more progressive. But its reversal is an odd priority during a living standards crisis. As the Institute for Fiscal Studies has found, the poorest households will gain just £7.66 a year from the measure while the richest ones gain £1,800 a year. Raising Universal Credit would be both fairer and better for growth: unlike the wealthiest, the poorest are forced to spend, rather than save, their disposable income. If living standards are to rise sustainably, the UK must not just become a richer economy; it must also become a more equal one.

After a decade of austerity that has frayed the public realm, and an unprecedented period of wage stagnation, voters are craving security and an active state. Ms Truss’s free-market, small-state individualism is ill-suited to the temper of these times. She has little or nothing to say about the improvement of public services, the UK’s regional inequalities and the common good. She is not a bridge-builder; she does not aspire to reach out across difference in order to build a new cross-class coalition. Even the Union between England and Scotland – which the Queen so cherished – seems of little concern.

The Prime Minister may have a vision of a larger economy but she has no vision of a better society. This creates an opening for Labour and the opposition parties, ideally working together, to forge a new settlement.