The Tory leadership contest has been badged as a “battle of economic ideas” between “prudent” Rishi Sunak and “go for growth” Liz Truss. But what exactly are these ideas, where do they come from, and how relevant are they to Britain’s current situation? Neil and Jonathan talk to economic historian Duncan Weldon about the contenders’ plans to put Britain back on track. Presented by Jonathan Ford and Neil Collins. With Duncan Weldon.
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Jonathan Ford 00:06
Hello and welcome to a long time in finance with Jonathan Ford and Neil Collins. In partnership with briefcase dot news, the service that brings intelligent curation and analysis to your media monitoring. The conservative leadership race has been winnowed down to its final two contestants. It’s been dubbed by some a ‘battle of ideas’ between former chancellor Rishi Sunak and foreign secretary Liz Truss. But what exactly are these ideas they’re battling about? Well, when it comes to economics, there are certainly plenty of differences. Sunak is pitching himself as the continuity Thatcher candidate. He is seeking to rein in public spending after all the splurging on the nevernever of the Johnson years. He wants tax cuts but is cautious about their timing. Truss, meanwhile, is the radical go for growth candidate who claims Sunak and the Treasury orthodoxy have choked off growth. She wants an emergency budget to scrap National Insurance rises, green levees and the planned corporation tax rise to the tune of 30 billion pounds, said to pick through these prospectuses in Neil’s garden, we’re here on a slightly
cloudier day than last time. But Neil still wearing his nice hat.
Neil Collins 01:26
Quite right too
Jonathan Ford 01:27
Yes, yes. We’re joined by Duncan Weldon, author of 200 years of muddling through an economic history of Britain and economics correspondent from the BBC, and also a great friend of the show. So welcome, Duncan.
Duncan Weldon 01:35
Thank you for having me.
Jonathan Ford 01:37
It’s great to see you again. Let’s start with growth with truss or Thatcher redux with Sunak. Before we look at their plans, let’s think about the economic state of the UK. What are the key problems that an incoming Prime Minister needs to fix?
Duncan Weldon 01:51
Okay, so the key short-term problem that’s going to face any incoming Prime Minister is that inflation is at a 40-year high, it’s at a 40 year high, it’s approaching 10%. It’s expected to be above 12% by this autumn, and that’s meaning the biggest hit to the cost of living since the modern records began. That’s the immediate problem. Sitting behind that is really a sort of 10-15 year period, in which growth has been really very sluggish. So you’ve had this really sluggish decade and a half, and now we’re being hit by sky high inflation and falling living standards.
Jonathan Ford 02:25
Okay, so it’s stag, followed by inflation. But now we’re getting stagflation, which is a right old witch’s brew. Let’s think about the candidates and what they’re suggesting. Sunak seems to be preaching return to Margaret Thatcher’s brand of economic management, whether that’s actually what he’ll do in practice.
Neil Collins 02:41
Well he certainly hasn’t done it so far as chancellor, as we’ve pointed out more than once here, as they used to say on checks, words and figures do not agree. He claims to be a tax-cutting Chancellor, but has in fact raised taxation to a level not seen for a generation or more. And I don’t think that’s a great background for him to claim that he’s the heir to Margaret Thatcher.
Jonathan Ford 03:06
Well, to be fair, Mrs. Thatcher did start by raising taxes. It was only later in her term of office that she cut them. And I think that’s what Rishi would probably say, I’m, I’m going to be prudent, I’m going to stick to the to the plan, get the finances under control and then let growth go by reducing… Well, what do you think?
Duncan Weldon 03:24
I mean, I think there is on one level there’s a big similarity between what Liz Truss has been saying and what Rishi Sunak has been saying. They both instinctively say, they’re tax cutters, they’re both the regulators. They both favour a smaller state. They’re both quite a big break from Boris Johnson. He was not a very traditional conservative in terms of how he thought about the size of the state. The difference, I think, is that, you know, Rishi Sunak says he is a fiscal conservative first, you know, he cares about trying to balance the public sector books about containing public sector government debt to GDP ratios, and he wants to sort that out before we cut taxes. For Liz Truss tax cuts come first, I actually going back to the 80s. You know, Rishi Sunak is the more Thatcherite and Liz Truss’ approach is more that of Ronald Reagan, it’s a Reaganite approach. If you cut taxes, you hope that speeds up growth, and you keep your fingers crossed.
Neil Collins 04:23
The last time you had a dash for growth, it ended very badly with Heath and Barber.
Duncan Weldon 04:29
but I think that’s a difference. It’s a question of emphasis. And it’s a question of timing. And yeah, I mean, I’ve been surprised by quite how aggressive Liz Truss is being in terms of the tax cuts She’s putting on the table at a time that interest rates are rising at a time that government debt to GDP is at what 100%.
Jonathan Ford 04:47
Now, so one of the ways she’s she’s characterised Sunak’s sort of approach to the public finances is to say he’s basically going to take us back into another bout of austerity, you know, bit like in the 2010s with David Cameron, and basically growth, which was has faltered since then. And it’s very startling when you look at charts of economic growth, the extent to which that austerity period in the early 2010s, and the post sort of financial crisis period, really not UK economic growth for (inaudible) is a kind of austerity period, if that’s what it really amounts to; the right thing to do.
Duncan Weldon 05:21
I mean, it’s really tough at the moment, isn’t it? I think, you know, the last time I was on this show, we were talking about the 1970s when everything went wrong, and this feels like a time like that when everything is going wrong at once. And it’s hard to know what policy should do. I mean, I agree in general, that growth for the last decade has been so much slower than the decade before the financial crash, you know, if the economy had grown between 2009 and 2019, at the same pace that it had grown in the decade before 2008, GDP per head would be about 6000 pounds higher, you know, a material… something has gone wrong. It’s hard to say that what Britain needs now is much tighter fiscal policy. Right. But on the other hand, you know, when debt GDP is at 100%, when interest rates are rising, when the government’s debt bill is rising, it doesn’t seem… when inflation is really high, a big fiscal giveaway when you’ve got inflation heading towards 12%, doesn’t sound particularly sensible either.
Neil Collins 06:21
No, it certainly doesn’t. And one of the things which is terribly important, is to keep the confidence of the markets to be able to raise the deficit that’s required, without force feeding them. Or perhaps you might say, we have to force feed the markets more debt, because otherwise they wouldn’t pay up. I mean, how much do you think that is going to impact if for the sake of argument, we got a prime minister who was going to say, well, we’ll add another 30 billion pounds to the spending, what would the impact on the markets be of that?
Duncan Weldon 06:55
I think you’d see the impact. I think the first impact you’d see would be from the Bank of England, I think if the government says we’re going to cut taxes, you know, in September, October, by 30 billion pounds at 30 billion pounds of demand into the economy as inflation is heading 12%, I think the bank will say at that point, okay. We need to raise interest rates even faster than we are currently doing. I think rather than looking at something like 3% next year, you’re looking at something like three and a half to 4%. So you’re straightaway seeing, you know, the government is injecting demand into the economy on one hand, and the bank is pulling it back out the other way. And that obviously has an impact on the gilts market. At the moment, you’re looking at higher interest rates, you’re looking at higher borrowing costs, you know, the government is suddenly spending more on its interest bill at the same time as it’s taxing less, and the public finances start to look a bit more dicey than they already do.
Neil Collins 07:46
They certainly would. And given the Bank of England’s recent record of failing to raise interest rates, I wonder whether they really are truly independent as they’re supposed to be, or whether they’ve seen Truss coming who was making threatening noises about reviewing the position, and whether or not they have the position the independence of the bank. Okay, she has hinted that the independence of the bank should be reviewed. She hasn’t said anything else. But that was enough, I think to send a shot across the bows. But given the fact that they have been so slow to raise interest rates, and they are now still so low, by anything other than the recent history comparison, seems to me that either they become another arm of the government, or they may raise rates, not to 3%, but rather more than that, which would have quite an impact on the economy, but might reduce inflation rather nearer to their target level of 2%.
Duncan Weldon 08:49
The bank is quite an easy punching bag for politicians and for contenders in this leadership election when inflation is where inflation is and no one wants inflation to be that high. I feel some of their attacks on the bank haven’t been exactly fair. Because what they say is the bank has let inflation get out of control. They don’t say the bank shouldn’t have provided as much support as it did to households, firms, the government in 2020 and 2022 and 2021. They don’t look at what the counterfactual might have been. I actually think if Liz Truss wins and becomes prime minister and pushes ahead with this tax cutting plan, her criticism of the bank is going to be the opposite one. She’s you know, at the moment, saying the bank has been too loose. If the bank responds to that, as I think the bank wouldn’t start hiking aggressively. She’ll start saying, I’ve got a plan for growth and the bank are crashing the economy. That will be the deep irony. She will attack them for being too loose. And then the moment they say fine, we’re gonna tighten policy, she won’t like it
Jonathan Ford 09:46
But then with the (inaudible) last thing she wants to do is to basically take responsibility into her own hands for interest rates, because that will give her another political fire to fight off.
Neil Collins 09:56
Sure, but if she starts criticising the bank from the position of being Prime Minister, then essentially, the bank’s independence is seriously compromised. And she can’t simultaneously blame them and say that they are independent.
Duncan Weldon 10:10
I think this would be one of those awkward conversations that civil servants have with any new prime minister when they explain what they should and what they shouldn’t be commenting on when it comes to economic policy and market-sensitive policies.
Jonathan Ford 10:22
Anyway, the bank would just say change the mandate. But anyway, we don’t want to get too bogged down into banking… to come back to Trusses plans, because she’s been a little bit more detailed, I think than, Sunak who has merely said, ge’s extremely prudent chap, that he’ll come, he’ll follow through with the details and the small print is a later date.
Duncan Weldon 10:39
Given he was Chancellor for two years,
Jonathan Ford 10:44
He can hardly set out a wildly different plan. But Truss has been accused by some as was sort of suggesting of, of being a student of the Erdogan school of economics, named after the Turkish president who seems to have managed to stir up a fairly fruity rate of inflation. Yes. And in Ankara.
Neil Collins 11:06
You cut inflation by cutting interest rates? Yeah, then you get hyperinflation. Right.
Jonathan Ford 11:10
Exactly. But so Truss’ response to all this, i.e. that you’re a fruitcake, who’s going to set inflation absolutely on fire is to say no, no, no all my plans – and this probably comes back to your point about Mr. Reagan – our supply-side reforms, lowering National Insurance is gonna get people into work, productivity will go shooting up and all the rest of it. Do you think that’s just wishful thinking on her part? Is there any substance in that.
Duncan Weldon 11:36
I can see the case that in the medium term, if you cut corporation tax, and effectively raise the returns on investment then maybe firms will invest more. And that will help the supply side in the medium term. You’ve got to put up against that, though, that we had a decade of cutting corporation tax in Britain, and firms didn’t respond, business investment was appallingly weak. So you know, hasn’t worked in recent experience. I can see if you cut taxes, you know, payroll taxes, like National Insurance, maybe you may encourage more people to work. But when you look at the sort of labour market problems in Britain at the moment, you know, it’s mainly either that people have left the country, that they are now on long term sick, or that they are older people who’ve retired early, and I don’t see many of those free pools of potential workers responding to lower taxes. So I think you can make the theoretical case, this will help the supply side in the medium term. But in the short term, the kind of tax cuts she’s talking about, really are just going to add to demand. And yeah, if you cut people’s national insurance bills, and they’ll have a bit more money in their pay packet at the end of the month, and in the first month, they will feel good about it. But if that leads to higher interest rates and higher inflation, they won’t feel good about for very long.
Jonathan Ford 12:46
Yeah. Because I mean, in your book, you wrote about the problems in the 1970s. I have to say, the more I look at this, the more I’m reluctantly drawn to the conclusion that if there is a parallel here, that we’re living through, it’s more the 70s than the 80s. In the 70s Britain faced a lot of shocks, which hit its ability to produce output, such as weak Sterling tick, and higher oil prices tick, but its leaders responded in the wrong way trying to kickstart growth and just created unbelievable amounts of inflation.
Duncan Weldon 13:19
It’s a different crisis in some ways in that the labour market is very different, you know, the 1980s did happen. It’s a different economy to the 1970s. But yeah, the fundamental problem is what’s really struck me listening to this debate about inflation, from Truss and from Sunak is, they’re not engaging with the reality of why Britain has sky-high inflation at the moment. And most of it is because energy prices are really high, food prices are really high, global supply chains are disrupted. All of this just means that because of these shocks, Britain is a poorer country than we wanted it to be. And the real debate is about how do we as a country, apportion that pain? It’s not how do we make the pain go away by cutting taxes?
Neil Collins 14:04
I think that’s a very astute analysis. And I don’t think any politician would ever dare voice it. Because to say that I have nothing to offer you but blood toil, tears and sweat. That’s not exactly an election-winning formula. But I think that you’re right, actually, I wonder whether we may be prepared to accept some pain, provided it was reasonably equally spread, and was put down to the cost of fighting the war, which is essentially the underlying cause of this.
Duncan Weldon 14:38
I agree. It’s really hard. You know, politicians like to talk about sharing the proceeds of growth, sort of, you know, allocating the costs of pain. It’s a very different debate to be having. But I think, I think that’s another you know, that’s another analogy for the 70s. I think if you look at the 1970s, or the 1920s decades in which Britain has had these really, you know, external
shocks and pain to allocate, politics really struggles to cope with that. What you get is volatile politics and bad economic policy because our political system really struggles to cope with that sort of debate.
Neil Collins 15:09
Yes. Well, you know, I will vote for anybody who tells me lies, beautiful lies.
Jonathan Ford 15:15
I have to say it hadn’t struck me that our political system was failing to cope with the distributional consequences of low growth. Can we talk for a second about the intellectual influences which the two candidates have cited? Because I think they’re both quite interesting. So Sunak has plumped, for unsurprisingly, 80s boy that he is, for Nigel Lawson, who obviously, I’d say is quite an interesting guy and a mixed record as Chancellor. He was indeed a tax cutter, which I think is a bit that Sunak is sort of cosplaying. But he also of course, presided over the Lawson boom, which was where his, the controls kind of ran away with it. So what’s your thoughts on that? What’s your judgement? Well, I’d be interested to know whether you think Lawson, is he a good role model for now. And what does it say about Sunak that he would sort of reference this character?
Duncan Weldon 16:05
I mean, I think from Sunak’s point of view, he’s the safe choice to go for, Margaret Thatcher’s most successful chancellor in many ways.
Neil Collins 16:12
Second most anyway. Oh, definitely, yes. But Lawson is the one we’re focusing on.
Duncan Weldon 16:19
Lawson is definitely a sort of a serious figure. If you go back and read, you know, Lawson’s May lecture on economic policy. That’s a serious speech engaging with the academic debate, the policy debate in the 1980s, he’s proper, big, serious economic thinker who knew his business and for the first half of his time as chancellor, you know, at least a very competent one. I think, what’s damaged his historical reputation is I think, you know, his fundamental mistake towards the mid to late 80s, was to assume that inflation was conquered as a problem. You know, he didn’t quite use the Gordon Brown language of we’ve conquered boom and bust or no return to boom and bust. But there’s a strong sort of sense there that you know, by sort of 86-87 this sense, okay, the hard bit has been done, the economy is being deregulated liberalised. Now we can put our foot back on the accelerator, and then you get into the Lawson boom, very quickly, suddenly, inflation is a problem, again, not as much of a problem as it was in the 1970s, or indeed today. But suddenly you’ve again, got high inflation, you have to press down, you’re back into that sort of stopped little cycle and you get, you know, that quite nasty recession in the early 90s.
Neil Collins 17:30
Well, his problem was that he became obsessed with shadowing the Deutsche Mark. That was his lodestar.
Jonathan Ford 17:37
And for listeners, the Deutsche Mark was the currency, abolished in 1999.
Neil Collins 17:41
Thank you very much for that historical note. But in the second half of his chancellorship, that was what obsessed him. And that was basically his downfall, in my view.
Duncan Weldon 17:52
And then, the moment you’ve done that you’ve basically sort of outsourced your monetary policy to the Bundesbank, and that, you know, you’re forced to sort of move with them and the interest rates that are appropriate for the German economy or the West German economy, then to really date this. The words are not quite, you know, the rates appropriate for Britain.
Jonathan Ford 18:11
Okay, so Truss, even more interesting call. She’s asked which economists agree and to be fair, this isn’t the kind of intellectual kind of lodestar (inaudible) which economists agree with you and your plans. And she said, she nominated Patrick Minford. Now he’s genuinely quite interested in figure, I think he came to prominence in the 1980s as the monetarist and more recently, he was an arch Brexit supporter, who basically suggested dropping all tariffs unilaterally and running down the car industry, if that was without losing much sleep, if that was the consequence. This doesn’t sound like a recipe for retaining many seats. What do you make of that?
Duncan Weldon 18:49
I think she was I think she was under pressure this morning. And you know, the name that came to mind was Patrick Minford. And you know, Patrick Minford. He’s been around for a long time monetarist in the 80s, member of the Council of Economic Wisemen in the 1990s. Under Ken Clark, I believe, and yet most prominent recently as a prominent brexiteer, unilateral free
trade drop all tariffs. I mean, you’re right, it doesn’t really sound like the retaining the red wall agenda, does it? I think this is going to be the problem that whoever wins has that they’re both more traditional conservatives. Boris Johnson was not a very traditional Conservative Prime Minister. You know, if you’re being charitable about Boris Johnson, he puts on…
Duncan Weldon 19:31
You’re being charitable, you say, here’s a man that pulled together a really unlikely unusual political coalition by promising tax cuts to some people and more spending to others and wrapping it all in a very hardline approach to Brexit. If you’re being uncharitable, you say that’s the cake isn’t it, we want his cake and we want to eat it. You know, we want to spend money here, cut taxes there. That approach is over neither Rishi Sunak nor Liz Truss is going to do it and I think whoever is the winner is maybe going to be able to appeal more to, you know, inverted commas traditional conservative voters. But I think those four dozen seats, they weren’t off labour in the north of the Midlands, Wales, they’re going to really struggle with either of these two.
Neil Collins 20:13
Do you think there is time between now and the next election for, let’s say, a Sunak-style budget this year, to produce enough headroom to be able to give them a little bonus enough to get them reelected?
Duncan Weldon 20:29
I think they’re in a real problem at the moment. So they keep saying they’ve got 30 billion pounds of wiggle room relative to their target. They keep talking about as if it’s 30 billion pounds, we’ve got to spend. And, of course, that’s 30 billion pounds, based on forecasts made in March forecasts, which are now completely out of date, they don’t include the full impact of the war in Ukraine, they have inflation at about five and a half 6% not 12%. That don’t have that debt service costs. They don’t include the 15 billion pounds they did in emergency cost of living support already, I mean, that that 30 billion pounds has already been spent. And that 15 billion pounds of sort of emergency help with cost of living with energy bills, whatever, I mean, that’s in theory, a one year programme. But I mean, if energy prices stay this high, that will presumably have to be rolled forward in some way next year, this all adds up. I’m not sure there is much wiggle room there at all. Now, you can change the fiscal targets, you can say previous fiscal targets were too conservative. I think Britain’s had either nine or 10 different fiscal frameworks since 2009. You know, you change these things every 18 months, that wouldn’t be a surprise. But the idea that there is this sort of kitty of money available to spend.
Neil Collins 21:51
It’s a political fiction.
Jonathan Ford 21:52
But Liz has to be fair, she has already nailed herself to the mast of the current fiscal framework. She’s not sort of said, actually, we need to look again at all these sorts of things. She’s said, I can do all this within the current targets we have. So it will be very interesting to see how to get on with that. Now, I know it’s very unfair to do this, because it’s very difficult thing to ask anyone but imagine that you were, rather than critiquing these two candidates, you were just jammed in the Captain Kirk’s chair and number 10 and told to Set Phasers to Stun them get cracking, do you have a sense in your own mind – what would be a sort of sensible way forward right now?
Duncan Weldon 22:34
I think macroeconomic policy is almost always about trade offs, then at the moment, because of all these external shocks because of supply chains, energy prices, war in Europe, whatever. The trade offs are harder, but I think what Britain probably needs is a bit of a different policy mix. I think there is a case for a bit of easier fiscal policy, not in terms of broad based tax cuts.
But in terms of targeted support to low income households for whom energy bills are a bigger share of their expenditure, and to firms for energy prices. Now, you know, firms have been really left out of support packages so far, and energy costs for firms are now turning otherwise viable firms atrisk closing, it’s worth supporting them if we don’t think energy prices will go lower. Now, the trade-off comes if you’re doing a bit more targeted support to firms and households, you accept that means the bank is going to hike more than it would have otherwise. So I’m saying what you probably need is a bit looser fiscal policy, a bit of tighter monetary policy and hopefully, if the bank is able to hike a bit more, that might give a bit of a fillip to the value of sterling. And I think you know, at the time we’re importing a lot of inflation, stronger Sterling would not be unhelpful, but this is not a great policy mix for asset prices. It’s not a great policy
mix for house prices so I’m not sure it’s one that you know, the next chancellor will be that keen on but I think that’s probably the best of a bad bunch I can think of.
Neil Collins 23:59
Sounds like another 200 weeks of muddling through. That was a long time in finance with Jonathan Ford and Neil Collins. Editing and Production is by Nick Hilton. And our sponsorship partner is briefcase dot news. Join us again next week.