The government has a crucial opportunity to get back on track in the upcoming Autumn Statement. It faces prospects of no long term growth, with a resulting eventual ruin of the public finances, and a likely recession in the short term. These prospects have confirmed that the Truss agenda for putting the priority on growth was correct.
I. The government should recognise that the Truss economic strategy was right and it should be continued. A year on, it is clear that the government’s present policies, which jettisoned her agenda, are running into the sand. They have been justified by the argument that they could not have been feasibly carried out, as demonstrated by the ‘market meltdown’ that they caused.
Yet, this meltdown argument is based largely on myths and an objective analysis of the Truss policies demonstrates they made eminent sense.
II. It is not to late the change direction and improve the economic outlook. The Truss economic policy was based on well-grounded economic principles: economic success is driven by growth in economic productivity that, amongst other things, is driven by innovation. Innovation, in turn, is driven by business incentives to innovate.
Supply-side policies in the form of low tax rates and liberal regulation provide business incentives to innovate. Under present policies innovation is being gravely inhibited.
The benefits of supply-side driven growth are clear:
- Under a supply-side-driven growth policy, the economy will grow providing the headroom for temporary borrowing to cover lower tax rates. Even so, because of economic growth, the percentage debt burden will decline steadily. After an initial period of say, 4 to 5 years, public sector borrowing as a percentage of GDP will become relatively lower under the growth strategy. As supply-side incentives to innovation kick in, a ‘virtuous economic cycle’ will result leading to the postrave outcomes.
- Under current government economic policy, the economy will stagnate (as is already becoming evident) and, after a short period of debt burden reduction (in percentage terms) driven by austerity, the short-term effects of increased taxation, and the effects of high inflation reducing the real value of debt and moving taxpayers into higher tax bands, the debt burden will increase requiring even more taxation. This will lead the economy into a classical ‘doom loop’.
III. Impediments to implementing growth policies should be eliminated
- Ensure that the importance of fiscal policy is recognised fully so that it can play its essential role in working in tandem with monetary policy
- Replace short-term fiscal rules with long-term solvency targets
- Make structural changes so that Number 10 can provide effective economic leadership
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