Kwarteng’s ideological approach will leave the Treasury with ‘no money’

The writer was a Liberal Democrat minister in the 2010-2015 coalition government.

Those who expected Liz Truss’ government to be “continuity Boris” will by now have recognised their mistake. The populist, pragmatic, non-ideological Johnson-Sunak era has been replaced with the tax-cutting, deregulatory, small-state ideology of the new prime minister and her chancellor.

Radical, bold, and ambitious are words that Truss and Kwasi Kwarteng will want associated with their economic plans. But others spring to mind: irresponsible, eccentric and regressive. Let us start with irresponsible.

When the Conservatives came to power, in coalition, in 2010, the Treasury was forecasting a budget deficit of just over £160bn for 2009/10. As incoming chief secretary, I received a now-notorious letter from my Labour predecessor admitting “there is no money [left]”.

The coalition established a new body, the Office for Budget Responsibility, to ensure transparency and to prevent chancellors from fiddling the forecasts. The OBR figures informed each fiscal event, often having an impact on the chancellor’s decisions. They are free of political meddling, and of the optimism bias towards which politicians are prone — not least in setting growth targets such as the current 2.5 per cent objective.

We embarked on a programme of deficit reduction. This was not some ideological obsession. It was intended to achieve three outcomes: keeping interest rates low, avoiding a build-up of debt to saddle future generations and ensuring that healthy public finances would allow bold responses to national emergencies (think pandemics and wars). Prudent fiscal management has permitted the UK to fund expensive interventions such as the furlough scheme and, now, the energy price guarantee.

For Conservative colleagues, this process of “repairing the roof” was their central mission. All of it has now been junked by Truss. The OBR has been sidelined; instead of the fiddled forecasts of past chancellors, on Friday we were offered no forecasts at all. Government borrowing is being massively increased not to deal with one-off crises but to deliver large, unfunded tax cuts. It is an extraordinary change of course — precisely when UK public finances need to be strengthened to meet the health and pension costs of an ageing population.

Next comes eccentric. How else to describe a government policy that seeks to boost growth through tax cuts while the Bank of England is having to raise interest rates to reduce inflation? Policymakers have their feet simultaneously on both the economic brake and the accelerator. The result is there to see in a surge in gilt yields, which will raise UK debt servicing costs.

If unfunded tax cuts could raise long-term growth rates to Kwarteng’s target of 2.5 per cent, they might be worth this incoherence. But there is little evidence of it. If Truss truly wants to raise productivity and growth, she will have to tackle more complex policy challenges: improving education and skills, planning reform, and mending our battered trading relations.

Finally to regressive. The cuts to income tax and National Insurance contributions hugely favour those on high incomes. Stamp duty cuts will benefit the older, richer and those in the southeast. Levelling up this is not. Truss might say she is prioritising opportunity. But there is an iron relationship between poverty and stunted life chances: we will never create a country of real social mobility on a rising tide of inequality.

This is a huge economic experiment. The result will be more debt, higher interest rates, starved public services and greater inequality. With a budget deficit, according to recent IFS forecasts, which could average around £160bn per year (or more) over the next two years.

Current Treasury ministers may need to leave a letter for their successors: “There is still no money left. We are back to where we started in 2010.” That would not be a happy legacy.