THE HAPS

The fallout of Labour’s economic mismanagement continues. Inflation is not responding to the Reserve Bank’s efforts so far, meaning high prices and high interest rates all at once. People are voting with their feet and leaving, just ask anyone who works at a hospital how many colleages they’ve farewelled this year. Sound economic management is one of the most important things the next Government needs to deliver.

MAKING SENSE OF TRUSSONOMICS

The political left and some journalists are raving on about how bad Liz Truss was. She was bad, but not for the reasons you’ll hear from the lazy left. If you listen to them, they’ll tell you "she cut taxes and that is bad."

Free Press believes it is critical that people here don’t take the wrong lessons from the last month in the U.K. That could prevent the next Government from fixing New Zealand’s economic policy.

Truss promised to cut taxes, but that was not in itself the problem. Truss did two big things wrong. One was that she dismissed the need to balance the budget, calling it "abacus economics" during her leadership campaign. Two was that she treated the usual process of budget-making in the U.K. with contempt, not asking the Office for Budget Responsibility to cost her plan, for example.

Together these two mistakes spooked markets. Nobody wanted to buy Gilts, British Government Bonds (that were once pieces of paper with gilded edges) unless they paid out a very high interest rate. Holding pounds started to look risky as the economy became unstable with a madwoman in charge. The currency went for a serious skate. High interest rates and a weak pound made the cost of living crisis much worse for British people, leading to a revolt that made Truss the shortest serving British PM ever.

The first part of the story, the tax cut part, had a lot more too it. The ‘Growth Plan’ that former Chancellor of the Exchequer (Finance Minister) Kwasi Kwarteng presented would cut taxes by £19 billion in the first year, rising to £45 billion in five years time.

At the same time Truss promised energy subsidies of £60 billion pounds a year in the first two years. She then promised this subsidy would be taken away the following year (yeah, right). Altogether she promised to borrow an extra £80 billion in the first year, three quarters of it was extra spending and one quarter was tax.

It’s not like the U.K. Government had been on a spending diet up to this point. Pre-COVID they spent £857 billion a year, this year they are on track to spend £1.1 trillion, 27 per cent more spending in four years, before Truss’s increases are added in.

Tax cuts were forecast to grow in future years, but there was no plan to cut spending, just borrow. Even after five years, the promise was that, for every £100 earned by Brits, the Government would spend £41. The tax cut would be about £2. They didn’t have a tax problem, they had a spending problem.

The mistake was a focus on tax rather than spending. America’s Republicans made this mistake in the 90s and 2000’s. They called it "starve the beast," thinking that cutting taxes would force Government officials to save money automatically. Government officials just borrowed more, and the public loved it because their taxes were low and their services got better. Now the U.S. Government has lots of debt.

Anyone who cares about fiscal policy knows that spending comes first, then tax. There is no way that a Government won’t pay its debts eventually, unless you want to live in a failed state, so this year’s spending WILL be taxed back sooner or later. Control spending, and the taxes will take care of themselves.

The second big mistake was Truss’s attitude to normal procedures in the U.K. Normally, the Office for Budget Responsibility costs out Government policy. Normally, the Bank of England is consulted with on budget measures.

Out on the hustings, trying to get British Conservative Party Members to make her Leader, and therefore Prime Minister, Truss said all this balanced budget stuff was ‘abacus economics.’

Free Press happens to think fiscal policy and monetary policy should be strictly separate. A competent Treasury should not need a separate ‘Office to Budget Responsibility’ to check its figures. However the U.K. did have those conventions so suddenly ignoring them was always going to cause trouble.

Snubbing the OBR and having a public fight with the Bank of England while claiming you can spend more, cut taxes, and keep interest rates low is nuts. If you make fun of abacuses, you can’t be very serious about balancing the budget.

The left will try to say Truss showed why not to cut taxes. What we should learn from Truss is that the most basic rules of economics are real, and breaking them is very expensive.

New Zealand needs is a commitment to shrinking the size of Government that starts with an end to wasteful spending, then cuts taxes. ACT’s Alternative Budget for Real Change laid out exactly how to do that in May. ACT is the only party laying out an honest approach to getting the size of Government under control so that New Zealand can benefit from more free enterprise and less state control.

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