Why higher economic growth may just save the Conservatives - Brian Monteith

Conservatives across Britain could be forgiven for feeling gloomy this morning as they survey the news.

Prime Minister Liz Truss delivers her keynote speech on the final day of the Conservative Party Conference in Birmingham

Most ways they turn there are large and mounting problems to be faced, but they are running out of runway to find answers that will deliver before the next general election.

There remains the prospect of a European economic recession; thanks to economic sanctions raising energy costs and separate food price inflation, getting through this winter will be a major challenge for everyone but especially the poorest. The number of public sector strikes will continue to grow, causing further disruption, while the seasonal pressures on our post-Covid NHS are mounting and will no doubt lead to calls for reintroducing lockdowns (ignoring those past restrictions are a large part of what we are paying for now.)

It's easy for the opposition parties, their cheerleaders and sections of the media to blame Liz Truss and Kwasi Kwarteng and hang it on her ‘libertarian” policies but it is a self-serving hoax. What we are experiencing is the ending of the delusion of “free money” perpetrated by our political leaders as a means to deal with economic shocks such as the global financial crash of 2007-09 and then again during the Covid pandemic.

Using Quantitative Easing to invent money to save financial institutions required a corresponding gradual move to Quantitative Tightening, but it is only now the US central bank, the Federal Reserve, is increasing interest rates. It is this regular monthly increase in interest rates that is driving the fall in Sterling, the Euro, Yen and other currencies against the US dollar and leading to the Bank of England to catch-up by raising its own interest rates.

This is why the mortgages for many are now increasing painfully – not, as the Government’s critics allege, because of a tax rate cuts scheduled for next year or a fall (and then relative recovery of Sterling).

Nor is it because of the Bank of England’s intervention to help pension funds that relied upon Government bonds (budgeted at a maximum of £65bn but only costing £4bn so far). It all comes back to what’s happening in the US – and the Fed has already announced it will increase interest rates again in October, November and December. The Bank of England will have little alternative but to follow suit. Had it started the process itself at an earlier date then the pain could have been milder but the Free Money has been too attractive to our politicians – it is, after all, what they used to fund the costs of lockdowns, without admitting it would cause economic distress from the hangover.

It’s as if a game of pass the parcel has been played by Chancellors Darling, Osborne, Hammond, Javid, Sunak, Zahawi and Kwarteng – only for the latest incumbent to be left holding the toxic parcel of rising inflation that requires countervailing higher interest rates – just when governments and people have overindulged in significant levels of debt.

While the mini-budget made economic sense (in that it should raise revenues, create jobs and soften the pain of inflation) it did not make political sense for a party that is clearly bitterly divided after an overlong and highly corrosive leadership contest.

The politics of the cut of the 45 per cent rate back to its original 40 per cent level – which as a stand-alone policy would more than have paid for itself – should have been marked down as something for the next budget, so the abolition of the NIC increase and the cut of the 20p rate to 19p could have taken centre stage and unified the party.

Instead, the Conservative’s very own anti-growth coalition saw an opportunity to rush the Conservative cockpit with Michael Gove taking the lead in wrestling the throttle from Liz Truss. Her attempt at an emergency landing, by dropping the cut in the higher tax level, might just have saved the passengers but they still have to take off all over again if they are to find a flight path to their electoral destination.

Fortunately, seeking to deliver greater economic activity is the right approach for it is what will give people an income, pay for the roof over their heads and put food on the table. If Captain Truss can show the remaining policies are delivering positive results she might just get enough lift under her wings to carry on – but she and her fellow ministers will need to go far further in loosening the restrictions and unburdening the private sector from the costs and corsetry of government.

In comparison to the opposition parties, the Conservatives have at least got themselves a plan for economic growth. If Truss can make the achieving of growth the issue upon which an election is fought, then hard questions will be asked of Starmer and Sturgeon.

For Starmer, it will not be enough to simply rely on acquiring corporate revenues from windfall taxes based upon fantasy figures. And they are fantasy. By definition windfall profits are not common and unlikely to be predictable, making them a poor foundation to underwrite public expenditure levels that Labour would put on an ever-rising trajectory.

For Sturgeon – who wallows in the worst record on economic growth of all political leaders – the revival of Labour in the polls makes a mockery of the next general election being a “de facto” referendum on secession. If voters in Scotland are faced with the question of voting Labour to remove the Conservatives – or voting SNP to achieve her holy grail then my money’s on them voting Labour.

For Truss, then, achieving visible and tangible economic growth is her only hope. If her MPs do not get behind her then they are signing their own political extinction.

Brian Monteith is a former member of the Scottish and European Parliaments and a Senior Adviser to the Tax Reform Council