The government failed to expound the moral basis for its tax cuts

A week really is a long time in politics. When Kwasi Kwarteng sat down after his great announcement, he seemed to be master of all he surveyed. The new Chancellor was full of confidence as he expounded his strategy for growth. In her reply, Rachel Reeves did not even mention the 45p rate cut. This minor excursion into Lafferism was surely more a matter of symbolism than of great fiscal consequence. Everything seemed on course. Then everything went awry.

It is still not clear why the markets were so comprehensively spooked. Herd instinct and panic played a part, and there is an irony. In recent weeks, the Bank of England had come under a lot of criticism from Government sources. But in the end, the Bank rushed to the rescue and saw off the spookers. A new injection of quantitative easing restored a tense stability, though more confidence-building rhetoric will be required from the Chancellor and the PM.

So what went wrong? First, there is no reason to blame the two principal aspects of the Government’s strategy. The first was a bold move to prevent an energy price crisis. The second, measures to stimulate the UK’s long-term growth rate, on which so much depends: improved welfare services, the spread of prosperity to those regions which have been left behind – levelling up – and higher living standards all round. Those are all laudable goals, yet the public is barely aware of them. 

There are three reasons for this. First, a failure to make the country aware of the international economic context. It is not only Britain which is threatened by inflation and energy costs: not only the Pound which has come under pressure. Second, a mishandling of peripheral issues; third, a failure to expound the moral basis for the Government’s actions. 

If you are intent on a radical new approach to economic policy, it may be advisable to shorten your front line and limit your targets. At a time of global uncertainty, it is not only the markets which are easily spooked. The voters too are prone to nervousness. There was a case for dispensing with Tom Scholar’s services. A new policy might well require new leadership in the Treasury. But Sir Tom is popular and respected. Here were young and untried politicians brushing aside Establishment anxieties and personnel at a difficult moment. There was no need for a rapid change, so perhaps it could have been handled in a less dramatic fashion.

The same was true of the Office for Budget Responsibility (OBR). At some stage, the Chancellor will have to explain his plans for public spending. But in the initial statement, he seemed reluctant to acknowledge this. It would have been better to do so at the beginning.

Finally, the 45p degringolade. One can see why the Chancellor was so keen to make the change, before his humiliating u-turn. For almost thirteen years under a Labour Government the top rate was 40p. Right at the end, Gordon Brown made a change, in a cynical manoeuvre to wrong-foot the Tories in the 2010 Election. Twelve years is long enough to endure fiscal cynicism. But Liz Truss is right. The Government has never done enough to make the case against high marginal tax rates. I wonder what percentage of the population are aware that the top one percent of taxers pay around a third of all taxes. All Ministers, including Michael Gove, should have been repeating that fact in almost every speech. 

That brings us to the Tories’ moral failure, which has nothing to do with tax cuts. There is a widespread political assumption that the Labour party has a freehold on the moral high ground. Though their policies may not always work, at least they care. (That is why the Tories must be careful not to lose their reputation for efficiency. To be seen as inefficient and uncaring would be a lethal handicap.)

But the Tories should have done far more to rebut this nonsense. If you want effective caring, you need free markets, free enterprise and a tax system which encourages incentives and growth. Then you have the resources to provide a high standard of public services. As Mrs Thatcher famously said, the Good Samaritan would not have been able to act on his good intentions unless he had money.

There is another set of beliefs to which a lot of Labour MPs covertly subscribe: egalitarian socialism. But there is only one problem. It does not work. If has often been tried. It has always failed. The result: unhappy societies full of gloom and immiserisation. In contemporary Britain, tax rates and public spending are at social democratic levels. Although our free enterprise system is just about able to cope, it would be unwise to add further burdens Mr Kwarteng’s economic confidence has in no way been dented during the last turbulent week, which is just as well. He will have to return to his themes, often and repeatedly.

In two cases, economics and politics overlap. In order to move towards balancing the books over the longer term, it would help in the Chancellor could find some spending cuts. Efficiency savings ought to help, but for some reason it seems easier to dream about them that to identify them. In general, public spending will not be a simple business. As Keynes said, “wages are sticky downwards.” The same is true of public expenditure, much of which consists of wages, where inflation will add to the difficulty, as it will to every problem. Kwasi Kwarteng will have to find a way of stimulating growth while controlling inflation. There is no textbook answer to that.

That will not daunt him. He is an able fellow, wholly at ease in his own skin, with apparently limitless reserves of confidence. He will have to use all of that to explain himself and his policies. That will neither be easy, nor impossible: merely urgent.

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