Inflation hit a 40-year high of 9.4% last week, a level not seen since the darkest hours of Margaret Thatcher’s first term.
The recession of the early 1980s will be long remembered, with declining production, plant closures and rising unemployment.
Today’s dire circumstances seem eerily familiar to me, not least because I was one of Mrs Thatcher’s trusted economic advisers.
When she came to power in the 1979 election, the biggest threat to Britain’s stagnant economy was double-digit inflation.
Patrick Minford, 79, was an economic adviser to Margaret Thatcher in the 1980s
There were times during the 1970s when the rate was the highest in Europe, exceeding 25%. Over the decade, food prices rose by around 300%.
Yet Mrs Thatcher’s government got away with it and I firmly believe we can do it again – provided, that is, we learn the right lessons from that time.
By the end of the 1980s, living standards were rising and Britain was no longer “the sick man of Europe”.
Today, double-digit inflation is a very real prospect, with the cost of food, fuel and mortgages expected to rise further.
And, just as I did with Mrs. Thatcher, I am happy today to stand with Liz Truss and champion the economic vision she laid out in her leadership campaign.
I believe the UK economy can easily sustain the increased borrowing needed to fund Liz Truss’ key promise: to start cutting taxes on her first day if elected to No 10. We need to revitalize our spirit of business, just like Mrs. Thatcher did, and this is the way to do it.
For all the furor his proposals seem to have caused among conventional minds – like the BBC’s Nick Robinson, who last week mocked Liz Truss for wanting to “borrow tons of money” – I am convinced that his program is good, simple saving, backed by lots of research.
Foreign Secretary and Tory leadership hopeful Liz Truss has made tax cuts a key part of her speech to be Britain’s next Prime Minister
She proposes, for example, to reverse former Chancellor Rishi Sunak’s corporate tax hikes and his unpopular hike in National Insurance (NIC) contributions.
Why? Because these taxes harm what is called the supply side of the economy, that is, the supply of goods and services. High corporate taxes discourage business investment and innovation, essential to economic growth. Meanwhile, National Insurance contributions are driving up wage costs corrosively.
Since canceling these taxes would stimulate trade and increase the supply of available goods and services, it would also directly reduce inflation.
Some disagree and say the tax cuts will stimulate consumer demand because they will be able to spend more. Inflation, they say, will rise even more as a result.
But that’s not right. It is entirely possible to cut borrowing and reduce inflation by imposing higher interest rates (monetary policy) while using tax cuts to support economic output and avoid recession (fiscal policy) .
Who says you can’t use both strategies at once?
When you look at the UK’s poor economic performance in recent years, you can see why Liz Truss’s proposals make sense.
After the 2008 financial crisis, Britain once again found itself in recession, David Cameron’s government pursued a policy of “austerity”, with severe restrictions on public spending to help quickly balance Accounts.
Ministers left the responsibility to the Bank of England to stimulate an economic recovery.
The Bank has embarked on a major program to inject money into the economy by buying the government’s own bonds, while bringing interest rates down to virtually zero. Yet the promised recovery did not materialize.
The UK economy remained weak even before the Covid-19 shocks and the war in Ukraine.
It would have been much more effective to also use fiscal policy, ie tax reductions for businesses and individuals. Higher interest rates, meanwhile, could have kept prices stable and inflation at bay.
Instead of printing – in fact – more money, we should have recharged the engines of real economic growth, as we should now. Today, interest rates need to rise – probably in the 2-4% range – and supportive fiscal policy can prevent the economy from tipping into recession.
Does it matter, as some say, that Liz Truss’ plans force the government to borrow to pay for the tax cuts? The answer is no.
Borrowing allows the government to set tax rates for long-term growth while helping to fund temporary swings in spending and tax revenue. Carefully planned borrowing helps mitigate short-term shocks.
Insisting that Britain’s spending be matched by tax revenue year on year, as Rishi Sunak does, is just a recipe for bad policy – as his absurdly damaging proposal for increase the corporate tax rate to 25%.
Of course, there must be an overriding commitment to sound finances. The two Conservative leadership candidates, Sunak and Truss, are committed to it. But strong funding comes from long-term planning, not from trying to balance the books immediately.
In the past two centuries, there have only been two times when Britain’s debts amounted to more than 200% of our annual economic output. Once after the Napoleonic wars, and again after the trials of World War II.
Yet on both occasions it was brought down to a manageable level over the long term – and without damaging the reputation of the UK market.
This is the approach we should take today, when the ratio of national debt to national output, or gross domestic product, is close to 100%.
The idea that we have to reduce it quickly in a panicked way is wrong and destructive. Yet that seems to be Sunak’s fiscal strategy – and it threatens to drive us into recession.
There is another useful element in Liz Truss’ economic proposals: the proposal to extend the period of time over which our national debt is repaid.
This would peg our debts at current low interest rates for a considerable period of time – an important protection, as the fight against inflation means interest rates are bound to rise.
In the end, what is exciting about the Truss program is that it puts growth and the reforms that stimulate it back at the center of the debate.
This is after years of government thinking neglecting “supply-side” measures in favor of a hodgepodge of other issues.
The Truss program is to reduce tax rates and liberalize regulations. It would once again unleash the commercial energy and dynamism that we know the UK is capable of.
After all, Britain was the birthplace of the Industrial Revolution, and Mrs Thatcher proclaimed that her aim was to revive that entrepreneurial spirit in us.
And in this it succeeded, as the growth spurt of the 1980s amply demonstrated.
But since then we have fallen back, as the economy has become increasingly encrusted with European regulations. Tax rates, meanwhile, have increased at all levels of the income scale, especially for entrepreneurs.
It is not only overall economic growth that will be boosted by the Truss program. It will also be a huge strength for the upgrade.
Our research at Cardiff University has shown that when taxes and regulations are liberalized, the effect on growth in the North is actually greater than in the South. Because the North has more idle resources – underutilized labor and land – the process will make it more competitive.
Liz Truss wants to reinforce this effect with a large number of business zones, which ambitious local councils can use to attract new businesses to their areas.
She proposes an economic program that could truly transform our economy.
I am convinced that he deserves the support of members of the Conservative Party. And that the country will be grateful to them for having approved it.
Patrick Minford is a former adviser to Margaret Thatcher and Professor of Applied Economics at Cardiff University.