Hunt Must Defeat the Spectre of Truss’s Failures Haunting Government

With time to reflect, what wisdom have we gleaned from last autumn’s tumult? The unarguable lesson is that the UK shouldn’t embark on unnecessarily reckless borrowing. In isolation, Truss’s proposed tax cuts — reversing some recent rises and snipping others — were hardly revolutionary. Yet against a backdrop of high inflation and a run-up of pandemic debts, added to by an extravagant, yet utterly unfunded, universal energy support package, bond market twitches soon gave way to soaring yields.

The scale of the planned borrowing was one factor. However, Simon Wren-Lewis, the macroeconomist, has argued convincingly that the lack of clarity over Truss’s intended spending plans and, hence, deficits, left investors uncertain about the path of short-term interest rates too. This made holding sterling assets riskier, sparking sell-offs. Suddenly, the value of the banal ritual of the ordinary budgetary process, complete with the Office for Budget Responsibility’s oversight, became clear.

At the time, the importance of detailing spending plans concurrently wasn’t as obvious. Emergency Covid-19 spending had breezed through parliament, no questions asked. The media was screaming “crisis” again, howling for the introduction of Truss’s universal support to rescue households and businesses from spiking energy costs. Nevertheless, Truss’s team now privately acknowledge that they needed more detailed spending plans and a debt reduction framework, even if that meant delaying the mini-budget itself.

These were major unforced errors. Yet they shouldn’t gloss over the failures of our state macroeconomic institutions too. The Bank of England’s independent monetary policy committee (packed with ex-Treasury employees and appointees) was asleep at the wheel as the money supply ballooned during Covid.

Nor is the Treasury without blame. Insiders say they just didn’t seem aware of a ticking time bomb — the liability-driven investments crisis. A sharp increase in gilt yields after the mini-budget forced pension funds with leveraged LDI strategies to raise cash to meet margin and collateral calls, meaning fire sales of longer-dated gilts, driving yields higher still. Only a Bank of England intervention arrested this doom loop. Such failures to ensure macroeconomic and financial stability deserve scrutiny today.

Just because Truss’s borrowing binge sent markets into the tailspin doesn’t mean her mooted supply-side reforms for raising growth rates were without merit either. With hindsight, rather than tax cuts, she should have prioritised her reforms to housing, infrastructure, childcare and investment zones, the latter of which mainly involved relaxing planning laws. All could have been attempted without significant new debt and, in the long run, would probably have had bigger growth impacts than the tax cuts anyway.

The reason she didn’t start there, of course, is that supply-side reforms are tougher to deliver. You need to sweat the details, yes, and that takes time. But any attempt to ease planning laws, negotiate trade deals, relax childcare regulations or approve new energy projects faces staunch resistance inside and outside of parliament. Self-interested regulators, companies, do-gooders and Nimbys form unholy blocking coalitions.

Truss’s team believed that tax cuts could grease the wheels here through the goodwill associated with a stronger recovery. They saw tax cuts as inextricably linked with regulatory reform as well: tax cuts would incentivise long-term investment, regulatory reforms like Solvency II would make it easier for major investors to fund UK projects, and easing planning restrictions for houses, energy and infrastructure would remove obstacles for these investments to proceed. The reform components here were always the most important. Sadly, we’ve seen little so far from Rishi Sunak’s government to suggest a strategy centred on removing such barriers, as opposed to just enlarging the government. On childcare, the government might have reformed staffing and registration regulations to encourage a more diverse range of providers. Instead, its centrepiece policy expands taxpayer-subsidised “free” care to younger children.

One understandable criticism of Truss’s approach is that she went all in without setting the stage, jam-packing a decade of contentious reforms into one announcement. She practically invited blowback by trying to lift the fracking ban, uncap bankers’ bonuses and abolish the 50p tax rate. Yet in those conditions and with an impending election, playing it safe was itself risky. Some changes, such as allowing more onshore wind, drew less criticism. Change always courts controversy but sticking to the same old, same old was a near-guaranteed ticket to stagnation — and defeat.

To succeed where Truss stumbled, Hunt must be more selective on supply-side reforms, but still bold. That requires breaking the symbiotic relationship between reform opponents and the popularity-obsessed in parliament. Pollsters and party whips will always advocate for caution and consensus, urging reforms be watered down. This approach just gives the opponents room to argue that the results of the changes will be too insignificant to matter, leaving politicians unsure on whether enduring the backlash is even worth it.

This, I think, is the biggest risk from Truss’s failure: that the spectre of past mistakes will haunt future decisions, scaring us away from even attempting the supply-side reforms that Britain desperately needs. As appealing as it is to retreat to the relative safety of the status quo, doing so is akin to treading water while the tides are pulling you out to sea.