To start with the economy, the answer is fairly simple, the impact will be minor. Any tax cuts that Truss imposes are highly unlikely to revive the economy and especially not in the short term.
The problem is low productivity, not high taxes and regulation, and that is a stubborn problem that will take some time to resolve. Thus Truss’s statement that her “bold new economic plan that will cut taxes, grow our economy and unleash the potential of everyone in our United Kingdom“ is just the usual political bluster. Unprovable in practice but catnip to the Tory party faithful who will be deciding her future.
Another odd Truss line is “where have the growth policies been for the past two years?” The answer seems quite straightforward. Post-Covid, the key aim was to avoid a recession and the big jump in unemployment that many forecasters predicted. This has, so far, been achieved.
It might be asked what this ex-Lib Dem and ex-Remainer believes in the broadest sense, but in terms of her economics there is a near vacuum. The lack of a strong commitment to levelling up, or to a green economy, suggests that it is lower taxes that will have to do all the heavy lifting.
Meanwhile much has been made, including by her, of the economist Patrick Minford’s support for her policies. Minford is renowned for his near-solo support for early Thatcher economic policies and for the impact of Brexit being positive.
Here again, he aims to challenge economic orthodoxy, but, as before, based on highly unlikely outcomes, like Truss and the Bank of England’s acceptance of interest rates rising to seven per cent.
To give an insight into Minford’s character, back in the 1980s, I played against him in a game of cricket between Liverpool (him) versus Manchester (me) University economists.
When not batting or bowling, he insisted on being an umpire and, to my mind, proceeded to give a series of outrageous decisions in favour of his own side (we still won).
Such an approach – ‘challenging’, going on biased and unrealistic – has , in my view, also been ever-present in his work, such as to question whether any serious politician should be taking his pontifications over the state of the economy at face value.
Moving on to the implications of Truss for government finances.
She has claimed that tax cuts would not be paid for by austerity – “I’m very clear, I’m not planning public spending reductions”. The only problem being that, effectively, she is.
If public service budgets are not topped up, to compensate for higher than expected inflation, then their real spending power will fall. But by using up the £30 billion public spending ‘headroom’ to introduce tax cuts instead, she will be forcing inflation-induced austerity on public services.
Furthermore, some budgets will be rising. Truss is promising an emergency budget and spending review, post-election, which will no doubt incorporate her commitment to much-increased defence spending.
It also seems likely that she will have to raise health spending, given the average five per cent pay deal now agreed for doctors, dentists and hospital staff. If she does not, then the NHS faces a double whammy from higher inflation and higher wages meaning less to spend on actual activity. Further top-ups may also need to be factored in for adult social care, and to aid with Covid catch-up in schools and courts.
On top of all that, a further household fillip, to deal with the next energy price hike due in the autumn, seems almost inevitable. But how will this be afforded when all the available headroom has already been used up in tax cuts?
Who might suffer in order to square the circle? Probably the usual suspects, with local government at the front of the queue.
What about the knock on impacts for Scotland?
Truss’s immediate income tax cuts offer the Scottish Government the chance to put further clear blue water between itself and the UK Government on tax policy.
This has the upside of helping raise the budget to help offset any cuts. However, it also has the downside of increasing the Scotland versus UK tax gap which raises the risk of behavioural change to avoid such higher taxes.
If the Scottish Government does have to find new savings – and remember that in the recent resource budget review (RSR), all public service budgets, bar health and social security, were frozen in cash terms (ie, falling in inflation-adjusted, real terms) until 2025-26 – then it is local government that has the most to fear.
Being non prioritised and the second biggest after health, the local government budget is likely to be seen as a prime candidate for belt tightening. This is in part because it is ‘easier’ to cut one big budget than a series of smaller budgets and it leads to less political flak.
As the Scottish Parliament Information Centre pointed out after the RSR, compared to 2013-14, the “core” resource budget (day-to-day spending) for local government is currently due to see a 13 per cent real-terms reduction by 2026-27. This begs the question, how much more can be taken out before the quantity and quality of local services are compromised?
Overall, Truss’s proclamations thus far leave a confused picture, as is often the case when leadership contenders are pandering to the party membership.
As it stands, her policies don’t stack up and are likely to need major overhaul as early as the autumn, which means that, in effect, we don’t really know what a ‘Trussian’ future holds for the economy or for public finances.
John McLaren is a political economist who has worked in the Treasury, the Scottish Office and for several economic think tanks