Kwarteng responds ‘no comment’ to pound fall
We use your sign-up to provide content in ways you’ve consented to and to improve our understanding of you. This may include adverts from us and 3rd parties based on our understanding. You can unsubscribe at any time. More info
An economist credited with being one of the architects of “Trussonomics” has said that the Government’s focus under the new Prime Minister is growth of the economy and long-term, sustainable public finances. Speaking to Express.co.uk following the Chancellor’s fiscal statement, Julian Jessop, one of three financial thinkers behind the new economic plan, said one of the key tenets of the new ideology was “a combination of being big, bold and decisive”.
Outlining the reasoning behind some of Kwasi Kwarteng’s recent announcements, he drew a distinction between policies which were supposed to service economic demand versus those aimed at tackling supply-side issues.
The economics fellow at the Institute for Economic Affairs said, though, that while he thought the cuts to income tax rates were “the right thing to do”, he felt the timing of their announcement had been misjudged, which had helped cause the market jitters seen in recent days.
Last week, Mr Kwarteng revealed the Government’s intention to cut the top 45p rate of tax altogether and cut the lowest rate from 20p to 19p. He also shelved a rise in National Insurance put forward by predecessors Boris Johnson and Rishi Sunak, and scrapped the cap on bankers’ bonuses.
Many on the right hailed the announcement as a return to conservativism in Government, but the sweeping changes – which came without an accompanying economic forecast – made the markets jittery and saw the pound slump to record lows against the dollar.
But a bold change in fiscal policy was precisely what Trussonomics called for, according to Mr Jessop, who was “informally advising” the Truss team in the run-up to her election as Prime Minister.
The former Treasury and Standard Chartered economist said that a key element to the financial ideology was “a focus on economic growth through a mix of tax cuts, tax simplification and supply-side reforms”.
He added it was the aim “to make sure that fiscal and monetary policy work properly together – which at the moment means looser fiscal policy, tighter monetary policy, because interest rates have been too low for too long”.
Another essential part was giving Government policy a longer-term focus, and Mr Jessop said he would like to see the three-year rolling debt-to-GDP ratio target extended.
He said: “For too long, we’ve been obsessed with borrowing from year to year, rather than what really matters, which is sustainable public finances for the longer term.
“We’re talking here about getting debt down as a share of national income over time. And occasionally, that may mean that you have to borrow a lot more in the short term, to secure strong economic recovery.”
Mr Jessop cited the energy bills freeze, which is estimated will cost over £100billion, as a “perfect example” of short-term borrowing to improve the health of the public finances in the long run.
He commented: “If we weren’t willing to spend, say, £60billion over the next six months, the outcome would be a deep recession, which would significantly scar the economy – and we’d probably end up spending more anyway because of the need to protect people during a recession and the loss of tax revenue.”
Mr Jessop argued that the top rate income tax cut was not aimed at boosting demand in the economy – which was usually done by giving people more money to spend and save.
“If you wanted to boost demand in the economy, then you wouldn’t cut the higher rate for higher income earners, because they’re always likely to save a fair chunk of their earnings anyway,” he said, adding: “Obviously, if you want to boost demand, then give more money to poor people, because they’re more likely to spend it and save it.”
Sunak sends veiled swipe at Truss and tells her to ‘own the moment’ [REVEAL]
Truss faces challenge as MPs send confidence letters over budget issue [INSIGHT]
Truss faces Tory MP’s unease after poll hands Labour 17-point lead [ANALYSIS]
Instead, he explained: “This is about supply side of the economy. It’s simply the case that people on higher incomes are usually more able and more willing to adjust their behaviour in response to tax incentives than the people on lower incomes.
“So if you cut taxes for higher income people, then it’s more likely that that will boost the labour supply and encourage big businesses that might employ high earners to locate in the UK, rather than elsewhere.”
Trussonomists believe that supply-side reforms are a necessary complement to boosting demand, and Mr Kwarteng has pledged more reforms to come in areas such as childcare, planning and cutting EU red tape.
Perhaps with a nod to previous attempts to bring soaring inflation in check, Mr Jessop said: “If you simply boost the demand side without affecting the supply side, there is a risk then that will you get a sort of a burst of inflation.
“But if you support the economy through the supply side, then you might increase demand in the process, but more importantly you’ll be increasing supply as well, so it’s not going to be inflationary in the same way.”
Though he supports the income tax cuts announced in Mr Kwarteng’s statement on Friday, Mr Jessop has said that he thought they were poorly timed, rattling the markets.
He said: “Those tax changes are not going to kick in anyway until April of next year, so it probably made sense to wait a month or two for the proper, full fiscal event in November when he could have published them alongside the full OBR analysis and forecasts.”
The independent economist added: “It sounds a bit Cavalier to be cutting taxes earlier than you have to, without any obvious analysis behind it. […] I think that the strategy is right, but the tactics were wrong.”
The market jitters and tumbling pound against the dollar have led some economists to call for the new Chancellor to scrap the plan altogether. But Mr Jessop said Mr Kwarteng “needs to explain it better”, noting that the “detail is coming”.
Many have also criticised plans to end the cap on bankers’ bonuses. Mr Jessop described the post-financial crash measure as a “political gimmick”, and said removing it “makes perfect sense because it shouldn’t be done in the first place”.
He argued that it “doesn’t achieve anything that people think it achieves”, as it means brokers receive a higher basic pay and a smaller bonus, instead of reducing their overall pay.
Source: Read Full Article