Keir Bradwell ‘leaps to the defence of Kwasi Kwarteng’ and writes of the government’s new mini-budget: ‘The Growth Plan is the do-or-die moment we've been lacking for years’. He writes in a persuasive and generally quite engaging manner, albeit lacking some of the manic energy which makes conversation with him so entertaining. But I think there’s a central mistake in his analysis.
Fundamentally, I agree wholeheartedly with the following claim in Keir’s post: ‘If the Growth Plan’s spending decisions are to work without causing massive inflation and baking in the currency depreciation, they need to be met with a more ambitious supply-side reform agenda than anything we have seen for the last three decades.’ And it seems clear to me that, on some level, Kwarteng and Truss have the same perspective. But it seems that Keir has only partly understood his own insight.
For this is the point: the government is primarily pursuing supply-side reform in order to ‘finance’ deficit spending and tax cuts, not as a pro-growth end-in-itself. This is important, because the government currently has a very limited stock of political capital - this is simply the nature of the present moment, between a sizable Labour poll lead and a general secular breakdown in Tory party discipline. In situations like this, difficult trade-offs are inevitable, and policymakers must set priorities: they must be clear about, out of their basket of ideal policy changes, which matter most.
Kwarteng, as it happens, has been more than clear about where his priorities lie in this very document. As Keir himself notes, while many supply-side reforms are discussed therein, there is an obvious lack of detail about them. By contrast, the tax cuts are discussed in full and have (rightly) been the primary focus on discussion in the media. You might say that the detail on the supply-side reforms can be filled in later; but, in actual fact, it can’t. By proposing such an unpopular and controversial mini-budget, nos. 10 and 11 are significantly spending down their limited stock of political capital, and making it less likely that they can get wins later on on more important matters.
Political economy concerns matter here: it’s worth emphasising once again that political economy concerns are the entire reason we have sluggish growth in the first place. In the case of housing, Keir’s first priority and mine, supply is low not because of conflicts between high-minded principles, but because of the power of a large rent-seeking homeowner class. This class has flexed its muscles before against Tory governments, leading to (e.g.) a parliamentary rebellion against proposed reforms under Johnson, and there is no reason to expect this won’t happen again. This emphatically does not render reform impossible - I am not one of Sam Bowman’s ‘doomsters’ - but it does mean it needs to be approached in a tactful, strategic, politic manner. The mini-budget does the opposite of that: it mines the road to growth, creating resentment and fear among the allies this government needs to rely on to get reform through.
Ultimately, Truss and Kwarteng have their priorities exactly backwards. Prioritising these kinds of spending policies over supply-side reform is silly precisely because, as Keir himself notes, you need supply-side reform to get them working in the first place. And on the other side, successful supply-side reform would itself increase British growth substantially more than tax cuts ever could. Indeed, prioritising supply-side reform could potentially (in the long term) be the correct perspective even if all you cared about was tax cuts, by creating more slack in the British economy and thus facilitating their introduction. I am not very confident in that claim, but I am very confident in this one: we should not just care about tax cuts, and should prioritise policies based on (among other things) their contribution to growth. On that score, Truss and Kwarteng have failed in priority-setting.
If I understand him correctly, Keir has in the back of his mind a model that is something like the following: by perching the UK on the edge of a cliff, with inflation and unsustainable deficit growth potentially becoming baked-in, Kwarteng will force the rest of the country to back supply-side reform as the only way out of a possible catastrophe. This is a very risky strategy, to put it mildly: as anyone who followed Brexit will know, the parliamentary Tory party is not averse to driving straight off a cliff rather than sacrifice its perceived integrity or the nation’s perceived sovereignty. But more fundamentally, it is an unnecessary risk for a pro-growth politician to take; proper priority-setting would allow this government to get on with the policies that most affect growth without faffing about with relatively marginal-importance changes to taxes and the deficit.
Keir cites examples (such as Geoffrey Howe) of chancellors and governments who have made such major gambles work in the past. But they have done so through successful politicking and expert use of events, as well as a healthy dose of luck. Yet Keir seems to suggest we should evaluate Kwarteng on the coherence of his ideal policy vision, rather than holding off on defending him conditional on his political ability. Economics, philosophy, and common-sense all tell us that more important than the content of Kwarteng’s wish-list is how he responds to difficult decisions and hard trade-offs, and how he navigates the difficult political challenges he faces. On that score, the mini-budget does quite badly indeed.