Trussonomics Will Worsen Inflation and Cost of Living Inequalities, Say Top Economists

Trussonomics Will Worsen Inflation and Cost of Living InequalitiesSay Top Economists

Sascha Lavin picks the brains of leading thinkers on the economic plans of the Conservative leadership frontrunner

Liz Truss, the frontrunner to be the UK’s next prime minister, recently told the Spectator that her programme of tax cuts and defence spending pledges – estimated to cost as much as £50 billion – would be paid for by accumulating a debt to be written-off over a long period, “like a war debt”. 

But experts have warned that, if Truss wins the keys to Number 10, she will be unable to simply borrow to fund her proposals in the way she has suggested. 

Instead, leading economists believe the only way she can finance her promises will be through cutting public spending at a time when public services, already crippled by years of austerity, are desperate for a cash injection. 

According to former government economist Jonathan Portes, Truss may be able to borrow to balance the books in the short-term. But, over the longer-term, her proposed tax cuts mean “less money for already under-funded public services at a period where demographic pressures mean we need to spend more, particularly on health and social care”, he told Byline Times.

One area of public services that cannot afford further cuts is the health service, which – according to the British Medical Association – has suffered “historical under-funding and under-resourcing” for over a decade. 

While NHS funding increased during the pandemic, the annual increases to state spending on health fell to less than 1% under the Coalition Government, before creeping up to just less than 2% before 2019 – compared to 6% annual increases under New Labour. 

The impact of austerity is clear to patients struggling with record waiting lists – which have now hit 6.6 million – scarce beds and excessive wait times. Almost 100,000 patients with serious heart problems have waited more than the 18 week target to receive potentially life-saving care, as of May this year, increasing their risk of dying prematurely; while cancer treatment referral targets have not been met since 2013/14.

But it is not just the health system that is in dire need of funding – with a number of public services barely intact, experts have raised concerns that they will not be remedied under Truss’ plans.

“The long-term challenges that are damaging growth in this country: levelling-up, low-income children falling further behind in school, and public services on the brink of collapse will go unanswered,” Jeevun Sandher, an economist at King’s College London, told Byline Times. “And it is difficult to see where she will get the cash to address them after her massive tax cuts.”

For fewer than 48 hours last week, Truss pledged a “war on waste” in Whitehall to save £8.8 billion a year – money that could have been used to partly finance her tax cuts and spending pledges. But she was forced to dramatically abandon the policy after criticism that it could have resulted in people outside London earning less. The dramatic U-turn makes further cuts to public services even more likely.

Truss’ almost decade-long record in Cabinet also suggests that as, prime minister, she would cut public service budgets.

As Environment Secretary, Truss nominated the Department for Environment Food and Rural Affairs to reach an early agreement to slash spending in November 2015 – one of only four departments to do so. Indeed, in her current position as Foreign Secretary, Truss caused confusion last year when a leaked email suggested a planned 10% staff cut, despite her publicly denying any such plans.

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Stagflation

Not only will Truss’ plan divert money away from public services, but economists warn that her pledges will worsen already sky-high inflation, which will, in turn, mean less money for public services in real terms. 

Adam Posen, a former Bank of England official, told this newspaper that “the fiscal proposals of Truss would worsen inflation, increase the inequity of who suffers the cost of living squeeze, probably weaken sterling further, and would force the Bank of England monetary policy committee to raise interest rates even higher than they otherwise would.”

Inflation is already predicted to hit 13% by October. If it rises as a result of Truss’ fiscal plans, then already-stretched public services will receive less funding in real terms and NHS staff, teachers and other public sector workers will face a real-terms pay cut.

But despite dire warnings from economists, experts and commentators that her spending plans will deepen the cost of living crisis and fail to address a looming recession, Truss has remained firm. She recently told the Financial Times that she would do things “in a Conservative way of lowering the tax burden, not giving out hand-outs”.

But, with food and energy prices rising, and benefits and wages failing to keep pace with inflation, hand-outs are what people across the country desperately need.

Analysis by the Joseph Rowntree Foundation, published this week, found that the Government’s current support package is only half of what is needed to shield the lowest-income families from the cost of living squeeze. 

Instead – as Truss’ leadership rival Rishi Sunak told the Sun – her economic plans won’t “touch the sides” in helping families to tackle the cost of living crisis. 

Take, for example, Truss’ proposals to scrap green levies. Her plan will only reduce bills by £150 a year, despite predictions that energy bills will hit £4,266 a year from January. A second policy plan to reverse the National Insurance rise fails to support those on the lowest incomes, instead benefitting higher earners. 

Posen, who runs Washington-based think tank the Peterson Institute, urges the Conservative hopefuls to “raise taxes on corporates and high-income individuals significantly, while increasing the benefits to lower-income households and cut programmes of hand-outs to those on higher-incomes – like the various support for home purchases – to fund increases in NHS salaries and employment”.

Public funding cuts not only harm those reliant on public services but damage productivity. Truss may have promised to make the UK a “high productivity powerhouse”, but data shows that a decade of austerity has stalled productivity growth.

Productivity is now 30% below the rate that would have been expected in the UK, if the country would have matched the growth trends seen between 1970 and 2008.

Although Sunak has attacked his rival’s economic plans as “fairy tales” throughout the leadership campaign, it seems that under a Truss Government there will be no happily ever after for public services or those facing the cost of living squeeze.