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As the Autumn Statement bears down on us, Britain’s economic prospects look grim indeed. On consensus forecasts, including my group at Cardiff, growth of GDP will hardly rise above zero.
This has two implications. First, that household incomes will stagnate. Second, given minimum demands for rising public services, public finances will deteriorate, with the debt-to-GDP ratio rising steadily over the next decade, after a brief decline fuelled by massive recent tax increases.
This Government was warned by a broad range of economists that their policies would damage growth and they would have done much better by keeping taxes down and putting growth first.
This would have meant borrowing more in the short run but far less in the long run. This was the position of the Truss government, which was heavily opposed by a coalition of Left-leaning economic commentators, the Treasury, the Bank, and a large section of the Tory party.
This opposition succeeded in destroying her government. Yet, as the facts come in, the Truss position has proved to be right.
The former prime minister’s Growth Commission has produced a good paper on this situation, The Growth Budget 2023, and how, even at this late stage, the economy could be turned around.
The commission has assembled economists from around the world who work on the supply-side of the economy.
Its proposals encompass a wide variety of supply-side reforms including bringing down the corporation tax rate ultimately to 15pc and restoring the indexation of tax thresholds.
To complement these, they urge a wide variety of sectoral reforms to planning, benefit and labour regulation changes to spur labour supply, and to the supply of energy via boosting the North Sea and fracking. They find these changes can raise output by more than 20pc over the next two decades.
Their paper comes on the heels of a paper I wrote for the Centre for Brexit Policy (CBP), centred mainly on tax and its effects on growth.
The striking point about the two papers is they both are scathing about the Government’s current economic policy, both say it is not too late to turn things around by adopting supply-side growth policies, and both project substantial increases in growth and a falling debt-burden from doing so, despite different authors and different analytical approaches.
My Cardiff macroeconomic research group finds just reversing the recent tax increases enacted by the Sunak government, would raise the growth rate by about 2pc a year. The Cardiff growth model has been tested rigorously on the data behaviour for the UK Thatcher period, for the UK since 1870, for China, and for the US in the post-war period. It fits them all.
We project the same GDP rise as the commission but over the next decade rather than the next two decades. This more rapid growth is a reflection of the Cardiff model incorporating the idea that business incentives to innovate are crucial to the growth of productivity, which is due to entrepreneurial activity constantly discovering new ways of production that drive down costs and raise profits.
But of course these are all just projections and uncertain in size. The key point is that we all agree on the direction of effect and the need to reset supply-side policies to prioritise growth.
Where the CBP paper goes further than the commission is in its verdict on fiscal rules. In the paper’s view, the short run fiscal rules now pursued by the Government, which mandate that the debt-to-GDP ratio must be falling by 2027/28, are extremely damaging because they force policies into the sort of tax raising we have just seen.
Instead, it recommends that the debt ratio be brought down in the long term, in line with the long-run conditions for government solvency. In other words, “long run fiscal rules” allowing tax rates to be set for the long-run welfare of the economy, prioritising growth and allowing fiscal policy to complement monetary policy thereby stabilising the economy.
The CBP paper also addresses the paucity in recent years of economic leadership from No 10, as well as the strong policy influence of a second fiscal body, the Office for Budget Responsibility (OBR), which is in effect a privileged think tank in the private sector, yet paid for by the taxpayer.
Such an arrangement is not found elsewhere and should be fully under democratic control. The paper recommends creating an American-style Council of Economic Advisers to the Prime Minister and integrating the OBR into it as a Civil Service body with an expanded remit and capabilities supplying advice and economic expertise to the council.
So what should Jeremy Hunt do on Wednesday? For a start, the Chancellor should stop fretting about whether tax cuts are affordable. The truth is, we cannot afford not to cut tax. If we continue as we are, the economy will continue to stagnate or, even worse, dip into recession drowning the nation beneath oceans of red ink and triggering a doom loop of further tax rises and loss of productive capacity.
Mr Hunt is the politician, not me, but with an election on the horizon, he must surely see that it is time to release the handbrake and inject some life into the economy. If not, the outlook is bleak indeed.
Patrick Minford is a fellow of the Centre for Brexit Policy and professor of applied economics at Cardiff University
Liz Truss was right about tax cuts
The economy will not grow without supply-side reforms