Former prime minister Liz Truss today made a speech to the Institute for Government on her vision for the UK economy. Here is the transcript in full:
It’s great to be here at the Institute for Government today. I’m having a rather more relaxing September than I did last year. And you might well ask, Why am I back talking about the same topic? But it’s one year ago that I launched my government and our economic policy. And I’m speaking here today, not because I want to relive the events of last year. I certainly don’t.
And it’s not because I’m keen to be back in Downing Street. I’m certainly not.
It’s because one year after saying that economic growth was the central issue for our country. Since then, we’ve heard a lot of people say that right across the political spectrum. That still is not agreement, or what has caused the problems of a lack of economic growth, but also what on earth we’re going to do about them.
And I think these issues are only getting more urgent. The reality is that over time, we’re not bringing in as much money as a country. We have the highest debt interest payments in the developed world. And according to the Growth Commission, the average person in the UK is now 9100 pounds worse off than the average person in the United States.
And I believe the reason that we have this problem is 25 years of economic consensus that has led to a period of stagnation and I believe that we need to shatter that economic consensus if we’re to avoid worse problems in the future.
The fact is the British public know that the consensus isn’t working, Lord Ashcroft’s poll on the state we’re in released on the fourth of September. revealed that 72% of people in Britain agree that Britain is broken, people are getting poorer, nothing seems to work.
We need big changes to the way the country is run, whichever party is a government. And yet despite the dissatisfaction the poll also reveals that people don’t agree on why we’ve got the problems and what the fundamental cause of the malaise in which we’re living is.
Now there are some people who claim that this is a crisis of capitalism, that we’ve had too much free markets, but quite the opposite is true.
The fact is that since Labour was elected in 1997, we have moved towards being a more corporatist social democracy than we were in the 70s in the 80s and the 90s. State spending now accounts for 46% of GDP, higher than it was in every year in Britain except for 1975 and up from 34.8% in the year 2000. No other European country has seen this level of growth in state spending, apart from Greece and Spain.
There’s also a growing burden of regulation. The cost of regulations introduced in 2022 alone is 10 billion pounds according to the government, and I believe that is an underestimate in the sectors that are key arteries of the economy, whether it’s energy, housing and banking, there is less competition or more government involvement than there was 25 years ago. The government still owns a 40% stake in NatWest. The cost of energy in Britain are twice what they are in the United States, and we have a severe shortage of housing.
The cost of welfare and pensions has ballooned by 50% in real terms, since the turn of the millennium, and even on an income of 50,000 pounds, it’s still possible to claim Universal Credit. Our tax system has become more complicated, with many facing high marginal tax rates when they seek to earn more income. Somebody earning 100,000 pounds with a student loan faces a marginal tax rate of 71%.
And we’ve had cheap money for over a decade, with nearly 900 billion pounds pumped into the system by the Bank of England through quantitative easing in an era of the near zero interest rates, something that’s completely unprecedented in 300 years of UK central banking. So how on earth did we get to this situation?
Well, my view is that after the successful monetary policy, and supply side reforms of the 1980s, and the winning of the Cold War by the West, we were all optimistic and upbeat about our future and we took our eye off the ball.
Free market economists went off to lucrative jobs in the city, allowing academic institutions and think tanks to be captured by the left. Demand management crept back in alongside Neo-Keynesian dominated monetary policy. And we conservatives allowed the debate to be framed and led by the left whether it was the anti capitalist arguments of the Occupy movement, whether it was the diversity with curry policies, or whether it was the statist environmental solutions.
We’ve all got to admit that it’s the left that made the running. And we’ve seen that regardless of which government has been in power, from the energy price gap to the 2050 climate change target to the ESG agenda in companies.
There’s been a cultural shift across both business and the public sector. Towards a lot more left wing policies. And despite the long record of failure of industrial policy, it’s back in vogue again, people are talking about it. And at the heart of this was the basic belief by politicians that the good times would go on forever. The discussion was about sharing the proceeds of growth.
It was about general wellbeing and happiness rather than GDP. The only question seemed to be how we will get to redistribute the pie. Not about growing the pie in the first place. But the problem is that 25 years later, we have seen a growing size and scope of the state. And that growing size and scope of the state has slowed down economic growth itself.
Levels of tax and regulation, are now too high to generate the amount of economic activity we need to help people’s incomes get bigger and to fund government services and that means our economy is now stagnating people talk about the productivity puzzle, but it’s really not a puzzle.
If there’s not enough incentive to go out and set up a business to take risks to compete, or even work. That’s a problem. People are delaying starting a family because housing is too expensive. And the cost of bringing up children is so high. Public Sector productivity is woeful, and millionaires are voting with their feet. The UK is third after Russia and China for the departure of high net worth individuals. And despite all of the evidence that these incentives have a major impact. There’s been a fatalistic consensus that these levels of growth in Britain are inevitable. And the economic models of the Treasury and the OBR reflect that they’re overly static and short term missed.
They underestimate the effect the tax and regulation have on people’s behaviour. And they tend to focus on one or two or at most five years of the effects of policy. I call this approach abacus economics.
The failure to factor in the dynamic effects of policy stalls out risks and problems for the future. So what we see is parts of the country that need investment don’t get it because the emphasis is on saving time or money now, rather than creating the conditions for growth in the future.
We see energy projects being cancelled, because the costings are based on yesterday’s energy prices, not on future energy security. And the Treasury is always allergic to giving up its levers of control, and so objects to more local decision making a more low tax zones.
This pattern of high spending, high tax and high regulation and low growth isn’t just taking place in the United Kingdom. It is taking place across Western Europe and across the United States, particularly the coastal states. And when we look at the counter examples of high growth in places like Poland, the Baltic states or Florida and Texas, they’re largely places with low regulation and low taxes in Poland Corporation taxes 19% and income taxes are extremely flat.
And yet despite all this evidence, the global left wants to double down on this strategy for statism and in fact, they appear to be meeting at the moment in Canada.
That is what Bidenomics is, it’s about injecting more top down subsidies, increasing debt and trying to reduce competition by levelling up taxes across the West. More regulation through the Environment Protection Agency amongst others. And to fund this federal spending is at 40% More than pre COVID levels. And it’s set to go up even more this year. Soon the United States will be spending more money financing its debt than it spends on its entire defence budget.
And Wall Street has just clocked on to this. Just recently they downgraded US debt which is meant to be the safest in the world. And despite the fact that it’s very clear that the West cargo on borrowing forever. The Labour Party have said that they want to copy and paste Biden’s policies onto the UK statute book. They’re calling their version of Biden’s policies. The green prosperity plan is not a green prosperity plan.
It’s a green de-growth plan. And it’s just a new name for the failed subsidies and high taxes of the past. Real economic security would mean incentives. So oil and gas producers want to come to the North Sea. And so people want to invest in the United Kingdom. And above all, real security means controlling public spending.
Now last autumn, I sought to take on this consensus and try and get the British economy on a better trajectory through a three pronged approach of targeted tax freezes and reductions, supply side reform and holding down public spending. It was clear that interest rates were going to go up and they would go up further. We’d had artificially low rates for too long, and they were rising across the world.
Therefore, in order to dampen inflation, and stave off a recession, the only tool we had at our disposal was doing all we could to fix the supply side of the economy and increase our productive capacity. As far as I was concerned.
This was an urgent task. And the growth plan which subsequently became known as the mini budget, sought to do this through targeted tax cuts supply side reform and spending restraint. I felt we needed to reform our tax system with mothers to make it more business friendly, and to make the UK a more attractive place to invest.
We needed to reverse the impending hike in corporation tax. We needed to cut the top rate of income tax to show that Britain was open to talent reforming IR 35 would cut red tape for small businesses and return to VAT free shopping would make our cities more attractive.
Independent calculations suggested that cutting the higher rate of income tax and the tourist tax would have increased rather than decreased revenues within five years. Those are calculations by the CEBR. So when people describe my policies as unfunded tax cuts, that is not an accurate description. In fact, quite the opposite of being unfunded these tax cuts could have include increased funding for our public services.
The OBR also say for the cost of freezing corporation tax was much less than the Treasury suggested. Their costing of the measures was 25 billion over five years, not 45 billion and regrettably, the static models used by the OBR failed to acknowledge this. The second part of the plan was supply side reform, with some of the biggest constraints to growth in the UK economy, being in energy housing and the labour market. On energy there was a risk of household bills going up to 6000 pounds due to decades of short term US energy policy that have failed to ensure our security. That’s what we introduced the energy price guarantee, while we work to open up fracking and the North Sea to make the UK energy independent.
Again, including by abolishing the windfall tax, again due to static costing, the cost of this was vastly overestimated. It will actually cost 27 billion pounds, less than half the 55 billion forecast by the OVR in the autumn of 2022. On planning we instituted Canary Wharf style investment zones with planning freedoms and tax breaks for a decade that would help drive new jobs and opportunities in left behind areas.
And we sought to make property ownership a reality for young people again, by reducing costs on developing the get passed on to renters and buyers. Whether it be through planning reform, reduced regulation, or speeding up planning decision. We also wanted to cut red tape on childcare to make it more affordable for families.
The third part of the plan was about public spending restraint. Now we were deliberately careful about discussing public spending, given the very difficult politics of it. What I tried to do as prime minister was navigate between the economic reality and what realistically we could get support for in Parliament. Having been chief secretary I know it’s very difficult to cut spending in year and it’s often counterproductive. In the past, we’ve cut things like capital, and then it’s come back to bite us later. Therefore, what I tried to do was change the trajectory of spending by holding spending down now in an inflationary environment, not reopening.
The Spending Review represents a tough approach. I also wanted as was widely publicised at the time to increase welfare benefits by wages, not prices. These two measures would have meant that compared to what we are spending now, we would have saved 35.5 billion over two years. 18 point 4 billion in 2023 24 and 17 billion in 2425. But even these modest savings did not command the support of the conservative parliamentary party. And it’s a very serious issue for us who wants to see smaller government that currently making significant changes to spending simply doesn’t have enough political support.
So those were the three key parts of the plan: targeted tax reductions, supply side reform and public spending restraint.
And of course, the growth plan was a starting point, a signal of direction further changes were needed, given the scale of the challenge we face.
CEBR analysis at the time suggests that if those policies have been kept in place, GDP growth would be 2% higher than otherwise by 2030. And investment would have been up 10% and could have been even stronger.
These impacts are even greater in the long term. The 20 year GDP impact is normally three to four times bigger.
And I think we can see from the evidence on the ground, the impact the policies would have had. Investment would not have faltered in the North Sea were it not for the windfall tax. We would have got moving on fracking and lower energy bills would have been on the horizon. A more competitive rate of corporation tax would have persuaded the likes of AstraZeneca to locate in the UK and there would have been more duty free shoppers and a boom in the number of self employed.
The policies are welcomed by business groups and voters like them as well. And since last year, virtually all of the policies in the mini budget have been called for 38 councils want to proceed with full fat investments aims, city firms are demanding more freedom to invest. Companies have called for lower corporation tax. There’s an entire campaign in the Daily Mail for tax free shopping and the self employed want IR 35 reforms. So why didn’t it happen? Why didn’t these policies which people wanted and would have resulted in economic growth not happen? Well, the reality is it was the reaction. So although I did get rid of the health and social care levy a new tax which would have no doubt expanded over time.
Unfortunately, most of the policies weren’t implemented. And they weren’t implemented because there was a reaction from the political and economic establishment, which fed into the markets, markets that were already destabilised by the Bank of England slowness. to hike interest rates and the failure to regulate LDIs. And I was effectively forced into a policy reversal under threat of a UK meltdown.
Now some people say we were in too much of a rush. And it’s certainly true that I didn’t just try to fatten the pig on market day. I tried to rear the pig, fatten the pig and slaughter the pig on market day. I confess to that.
But the reason we were in a rush is because voters had voted for change. They voted for change in 2016 and they voted for change again in 2019. And I wanted to deliver that change, and I knew we had limited time. I knew with the level of resistance or the lack of preparation, that things weren’t going to be perfect.
However, given the situation the UK was in, it was important to take action and not to do nothing. Because I went into politics to get things done, not to do public relations. And to all the people who said that, if we’d spent more time rolling the pitch or we’d done things in a different way. Or we delayed things, we would have been able to deliver our programme. I asked them to look at what has happened since. By October the seventh through the OBR was already leaking their calculations that there was a 70 billion pound hole in the budget.
These numbers of course subsequently proved wrong. But the leak would have made delivery of the corporation tax freeze untenable. And since last year, no major supply side reforms or tax cuts have been allowed to happen. Whether it’s on financial services, childcare planning, or on the environment. In fact, 150 Conservative MPs have written to the prime minister saying there should be no change in net zero legislation.
So although there’s no doubt that the communication could have been better, and the operation better honed I think we all have to acknowledge in the room that this wasn’t just a process problem. There was unquestionably a reaction to the policies themselves. And the fact is that supply side economics and a belief that the size of the state needs to be reduced are ideas that no longer command widespread support and understanding.
The anti growth coalition is now a powerful force, comprising the economic and political elite, corporatist parts of the media, and even a section of the conservative parliamentary party. The policies I advocate simply are not fashionable on the London dinner party circuit.
In fact, what is interesting is when you look at the polling evidence, the people who want change and support these policies are less likely to be comfortably off in London and the Southeast. The law of Ashcroft poll shows very clearly, those who want to see lower taxes and smaller government and who are tougher on welfare tend to live in less affluent areas. Many of those are people who started voting conservative in 2019.
And, in addition to that, there are some of the policies I advocate that just don’t have very much public support at all. such as cutting the tax top tax rate, building more homes, of getting or getting rid of process when building infrastructure projects. But frankly, we need to find a way of doing these things. Otherwise, we’re not going to get the prosperity and the opportunity that people want.
And we can see that policies I advocated working right now, in places like Texas, Florida and the Czech Republic. Even Germany, is now cutting corporate taxes and reducing regulation. If the situation was urgent last year, it’s even more urgent now. The UK is in a serious and precarious position and there is a real risk of a downward spiral. The national debt was 525 billion in 2005. By 2022, it had quintupled to 2.5 trillion, and it’s set to drop 3 trillion within three to four years.
I believe we can get out of this. But the only way to get out of the debt spiral is to get a grip on public spending while implementing policies to grow the economy. I urge the government to be bold and to set out a clear vision of how the UK can get to sustained 3% annual growth within a decade. This should set out a clear tenure trajectory for reducing the size of the state as a proportion of our economy through a combination of growth and spending control. We should aim to get that ratio we achieved at the turn of the millennium.
Before Blair and Brown turned on the spending taps and excess regulation made us uncompetitive and we need to give people hope that things can get better. We need to spell out what 3% growth would mean in terms of improved standard of living and opportunities for an average family. A new car or holiday abroad, more support for your children.
And ministers need to go out and explain the why as well as the how we need to make the case for free market economics and omit the state has got too big, partly as a result of excess spending during COVID. We need to show an enterprise economy is good for everyone. Conservatives can’t just assume people have read Milton Friedman. We need to spell out our philosophy and that would contrast with Labour’s lack of ideas or force them to defend the stale economic consensus started under Blair and Brown.
Now in order to deliver this, there’s going to be big change required. We need a new supply side revolution, the supply side revolution in the 1980s was all about taking a long productive industry and the unions, which held the whip hand over the elected government of today of the day. The supply side revolution now has to take on the burden of regulation and an overlarge over powerful bureaucracy which has the whip hand over the elected government. This supply side revolution has to encompass changes to tax regulation and the size of the state.
The government needs to take on the OBR over the impact of tax policy, and we need to see much more sophisticated levels of analysis from the Treasury about long term economic growth. This needs a wide variety of thinkers, including monetarists and supply siders. We can’t afford to be uncompetitive internationally. We need corporation tax back at 19%. And we should also refuse to implement the OECD minimum tax agreement which I previously labelled a cartel of complacency.
It won’t be implemented in the US and even if it was it would make the entire West uncompetitive. We also need to reduce marginal tax rates to make it worthwhile to work at every income level. Further changes like abolishing the tourist tax, abolishing the windfall tax and sorting out IR 35 needs to be made. We also need to get a grip on the ballooning welfare and pensions bill.
This means slowing the rates of increased benefits and tougher work. Requirements. It means raising the retirement age further. And as a party we have to deal with a difficult issue of the increasing costs of pensions. The current trajectory is not sustainable. We need more competition and less corporatism in key sectors of the economy like energy and finance. I favour a single utilities regulator to get rid of the balkanization and capture that we’ve seen under organisations like off water and OFGEM.
The government needs to divest its shares in banks and withdraw from micromanagement in sectors like transport. And in the energy sector, we need to get on with fracking and abolish the windfall tax in the housing market that should be tax breaks in return for having new developments in homes in your area, a much simpler zoning process and speeded up infrastructure projects.
That’s what the original investment zones I proposed are about we should diverge properly from the EU. So we can increase competitiveness in areas like financial services. And finally, we should as many other Western countries already doing delay implementing netzero commitments such as the ban on new petrol and diesel vehicles from 2030.
Other environmental regulations which are hiking the cost of living, like enforcing the replacement of gas and oil boilers should also be abandoned. Ladies and gentlemen, in conclusion, there is a growing consensus that we need to grow. But although people will the ends, they don’t necessarily will the means.
In order to grow, we need to change and that starts with acknowledging that we have a problem. It means abandoning the stale economic consensus. It means politicians doing the right thing even if it’s unpopular. This will not be easy, but it will be worth doing. With determination to turn things around, we can make Britain grow again. Thank you.