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For the new PM, crisis management and driving stronger growth are strange bedfellows

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Published: 26 Sep 2022

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The Conservative Party, sometimes said to be one of the world’s most effective election-winning machines – a reputation that may be tested at the next general election in 2024 – is also quite good at reinventing itself.
The Conservative Party, sometimes said to be one of the world’s most effective election-winning machines – a reputation that may be tested at the next general election in 2024 – is also quite good at reinventing itself. Liz Truss is the party’s fourth leader, and thus its fourth prime minister, in 12 years. 

Each time there has been a change, it has felt like a change of government, to the point where, for many voters, it might be hard to tell that the same party has been in charge. For five of his six years as PM, David Cameron led a coalition government and will be best remembered for post-crisis austerity policies and a fateful decision to call a referendum on EU membership. 

Theresa May, who succeeded him when the referendum did not go the way he intended, became party leader unopposed and took office with a reservoir of goodwill that quickly evaporated. Her premiership was all about trying and failing to hold together a fractious party on Brexit. 

Boris Johnson’s three years at PM were unlike any other holders of the office. Unfocused and untrustworthy, he nevertheless left office with many Tory supporters wanting more. 

Truss, focused and hard-working, will be different. While Johnson quickly got bored with the government’s agenda, she will be relentless in delivering it. The consensus is that she has taken over at a terrible time and this will overwhelm her premiership. But that was also her heroine Margaret Thatcher’s inheritance in 1979. For Truss, taking over at a bad time might mean that the only way is up. That may also be true of her reputation, given that polls showed that expectation were very low. 

Truss has already demonstrated her willingness to act big when it comes to the energy crisis, and in doing so validating some of her rival Rishi Sunak’s warnings that the public finances would not be safe in her hands. The new PM, who believes in a small state and, strangely, pledged “no handouts” during the leadership campaign, came for ward with a huge unfunded handout – freezing energy bills – within two days of taking office. 

That handout, a blank cheque whose ultimate size depends on the course of gas prices in coming months and years was what the director of the Institute for Fiscal Studies Paul Johnson described as probably the biggest “fiscal event” of his lifetime. He estimates that the cost could be £150 billion or more, though the new prime minister’s statement on the price freeze was unaccompanied by any costings, which was unprecedented. 

Her energy announcement, made on the morning of Thursday September 8 was, of course, overshadowed by a much more important, and sadder, event, the death of Queen Elizabeth II. At times like this, politicians are not supposed to make such calculations, but the danger for the new administration is that, notwithstanding its huge cost, the package may not cut through to the households and businesses it is meant to help. 

It follows a series of measures announced since the spring, mainly by Truss’s leadership rival Rishi Sunak. As it is, people and businesses will face higher energy bills this winter, though not as high as they would have been. Economists still think that the outlook for the economy over the next few quarters is gloomy, though a recession is marginally less likely than it was. Inflation will peak at close to the current 10%, rather than rise to 13%, 18% or even 22%, as some were predicting. 

What is the strategy? The new prime minister, having demonstrated her willingness to use the power of the state – and add to government debt – to avoid the worst effects of the energy crisis, is not going back on her pledge to make tax-cutting an integral part of her premiership, beginning with reversing the 1.25 percentage point increase in National Insurance which took effect in April, and the increase in corporation tax from 19% to 25%, which was due to happen next April. It is instructive, and slightly sobering, to recall that a few weeks ago those tax reversals appeared to present the biggest fiscal risk offered by a Truss government. Now, compared with the energy bailout, they look like small beer. 

For Truss, and her chancellor Kwasi Kwarteng, the only way to make this largesse work, and keep markets onside, is stronger economic growth. Both are committed to raising the economy’s “trend” growth rate to 2.5% a year. This, the long-term rate of growth, is estimated by the Office for Budget Responsibility (OBR), the economic and fiscal watchdog, to be 1.4% a year. The economy has only averaged 1% a year growth since the start of the financial crisis. 

Stronger sustained growth would be a powerful elixir for the economy, helping generate the revenues that would make Truss’s energy handouts and tax cuts look well-judged rather than fiscally very risky. The new prime minister and her chancellor are hoping that what she would see as the first down-payment of tax cuts will lift the “animal spirits” of businesses and persuade them to invest, while cheering up gloomy consumers. 

It could happen, though you would not want to bet the ranch, your mortgage, or even a fiver, on it. The early years of Queen Elizabeth’s reign saw gloom and austerity soon followed by strong economic growth and a mood of “you’ve never had it so good”. The government would love the reign of King Charles III, the new Carolean era, to develop in a similar way. There is no guarantee at all, however, that it will. Hoping for growth is not the same as achieving it.