ALEX BRUMMER: New Chancellor Jeremy Hunt must embrace growth but may fail because his Prime Minister Liz Truss doesn’t last the course
Kwasi Kwarteng’s dramatic early retreat from the IMF annual meeting in Washington, on a rain soaked night, is one of those moments set to become part of economic folklore.
The parting message from Kwarteng was he was heading back to sort out the UK’s medium-term fiscal plans.
Reality is that it was for a merciless sacking by an old friend – and another screeching U-turn for Liz Truss’s hapless administration. Kwarteng will go into the history books as Britain’s shortest serving chancellor, spending just 38 days at HM Treasury, with the exception of another Tory Ian Macleod, who died in office.
Latest appointment: Liz Truss is rapidly seeking to return to the country’s more fiscally conventional roots with the choice of twice failed leadership candidate Jeremy Hunt
It must be a brutal disappointment to the brilliant Old Etonian who was so ambitious to change Britain’s slow-coach economy for the better that he clattered the hurdles at the first barrier.
Now Truss is rapidly seeking to return to the country’s more fiscally conventional roots with the choice of twice failed leadership candidate Jeremy Hunt.
There is a bit of a history of disappointing chancellors being followed by more competent incumbents – Roy Jenkins after Jim Callaghan, Ken Clarke after Norman Lamont among others. Hunt could play this role, but may fail because his PM doesn’t last the course.
So far the Truss administration has retreated on two tax fronts. It has scrapped the mainly symbolic cut in the top rate of income tax from 45 per cent to 40 per cent and reverted to Rishi Sunak’s plan to raise corporation tax from 19 per cent to 25 per cent.
In many ways, this was the central proposal in the mini-Budget. This is hugely important to the UK as it seeks to remain attractive to overseas investment in the post-Brexit era and finance its widening external deficit.
But the biggest failures of all were ones of governance. The abrupt sacking of top Treasury mandarin Tom Scholar and the mule-headed decision not to accept an early assessment of the fiscal-event by the Office for Budget Responsibility was a devastating mistake. It tipped the markets into paroxysm. As a writer who embraced the Truss-Kwarteng fiscal event and the determination to give the supply side of the economy a chance to boost productivity and growth, this is a mea culpa.
In my enthusiasm to see enterprise, endeavour and entrepreneurship unleashed I failed to recognise the faith which the financial markets and global monitors place in playing by the fiscal rules.
Joe Biden’s administration is able to get away with his $2trillion (yes, $2 trillion!) largely unfunded and misnamed Inflation Reduction Act, but that is not a luxury which an untethered pound can afford in turbulent times.
Yet there is a paradox in watching Kwarteng trudge the corridors of the International Monetary Fund this week to be lectured by several of those he met on the profligacy of his ideas. US treasury secretary Janet Yellen arrived in the room to meet Kwarteng agitated. She wanted to see British fiscal and monetary policy work in tandem, and the independence of UK institutions reaffirmed. Fed chairman Jay Powell chose to lecture the former chancellor on the need to work on the demand side of the economy, keeping output and consumption bubbling along with supply side measures.
And IMF managing director Kristalina Georgieva lectured on the need to have monetary and fiscal policy working together in the battle against inflation.
It was a chastising experience for a chancellor not used to being challenged.
Given the UK’s lagging productivity, it would be pity if other supply side reforms were buried. VAT shopping for overseas visitor is a must. The IR35 effort to bring freelancers into the tax net needs to be abolished. And one way of mitigating the reversal of the corporation tax rise is to extend the ‘super-deduction’, or some version of it, so as to encourage R&D, training and other investment spending.
The case for ‘investment zones’ is keenly made from Teesside, and in the past Liverpool and Canary Wharf, but it requires determination and leadership to see them brought to fruition. Teesside and free ports had the wholehearted backing of Rishi Sunak, and previous attempts to revive forgotten corners of the country had Michael Heseltine.
Whether the current badly weakened Tory government has the band-width to pursue such ideas is an open question.
But it is their best chance to escape the gloomster narrative.