Truss and her Budget Blunders

Dr Clive Black

October 6, 2022 5:28 pm
Truss and her Budget Blunders

In May, Nottingham Forest FC were promoted back up to the Premier League after a 23 year absence – Trentland was on fire. However, by the start of October, the newly promoted club sits at the bottom of the league, £150 million worse-off after poor recruitment choices, and is considering sacking their manager, Steve Cooper.

One senses that Forest’s experience mirrors that of Liz Truss, the UK’s new Prime Minister. During a blistering summer of hustings around the country Liz promised the earth. Then just four weeks in, her Chancellor, Kwasi Kwarteng, delivered one of the most notable ‘Budget’ car-crashes ever. Already there’s talk of replacing her from within the party.

The fine British food and drink sector is facing so many external challenges, another dysfunctional British Government tests the tether. The external pressures have been chronic in the past decade; the Scottish Referendum, the UK-EU vote, Teresa May, Boris Johnson, the pandemic, Putin’s terrible invasion of Ukraine… and now Truss/Kwarteng.

The prospect of a UK Government that challenges some of the conventions is not unappealing. However, this needs to be done with some work around context, understanding, and knowledge – so that deliverability is achievable. None of these traits seem to have been applied by the Chancellor when crafting his non-Budget. Hence gilt yields have been driven up, raising the price of borrowing. But more expensive money decelerates growth!

Increasing the cost of money should only be managed by the Bank of England, but it has a history of sleeping at the wheel. Recently the BoE was slow to anticipate the thought processes of the US Federal Reserve and the US dollar – which has been the World’s Reserve Currency for the last half a century. So why were UK base rates only raised by 0.5% in September when the ‘Fed’ did so by 0.75%? Such a move is confusing when currency and bond markets were anticipating a 0.75-1.0% move. This has widened an already considerable differential in relative monetary pricing.

Kwarteng had an open goal to ask the Bank why it did not raise above 0.5% in order to control the key variable of the economy at this time, inflation. However, he decided to hog the limelight with a delusional tax cut for the highest earners.

Having back-tracked on the ’45p’ tax rate, the attention now turns to benefits. This is a very important debate for business and employees. No one wants to see those on lowest incomes exposed to falling living standards, but is it fair or right that those working receive a lower increase in income than those on working benefits? In a tight labour market, is it sensible to incentivise the lowest paid to take benefits rather than work?

As I see it, there are two ways out of this. Increase benefits and the National Living Wage by inflation – the latter of which the Low Pay Commission may do. Or increase benefits in line with earnings, which maintains relative living standards and does not increase the disincentive to work. Indeed, rather than cutting the tax rate for the highest earners, the Chancellor would do well to put more serious time into:

• raising personal allowances and incentives under the Universal Credit system to encourage work

• selectively increase immigration to help existing pinch points in the food industry – where British unemployed people demonstrably do not and will not work – thus reducing labour inflation

• adjusting the structure of the vocational education and apprentice system to build a skilled work-force and cut university attendance, meaningless degrees and masses of student debt

There is still time for this Government to re-group and actually do something positive on the supply side to cut inflation – indexing benefits would cost more than £7bn per annum over matching earnings and help the productivity and profitability of the British food system. One should never lose hope but it is hard not to have that sinking feeling.

From a Coriolis perspective, we focus upon improving productivity at the coal face. If you wish to explore what we can do for you, give Mark Dudley a call, we are accessible, straightforward and applied. 

Dr Clive Black
Senior Advisor
Coriolis Consulting

October 2022

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