Without the Budget, post-lockdown Britain would be heading for terminal decline

Britain has been due a financial reckoning since Covid. Truss’s bold pro-growth plan is our only hope for recovery

For the first time in three decades, we have a government focused on prosperity. No more cheap money. No more ghost-growth. Britain will concentrate on real-world wealth, removing barriers to enterprise so that we can all see rises in our living standards – especially people who depend on their salaries and so have missed out on the asset bubble of the past decade.

Why then have so many of the intended beneficiaries taken against it? Why do the polls suggest that only two or three Conservative MPs would hold their seats in an election? Why have many of the Tories who backed tax cuts during the leadership contest fled at the first crackle of musket fire?

The answer lies in our neural wiring. Liz Truss’s budget, however reasonable its contents, triggers three deep-rooted cognitive biases. First, change-aversion. Secondly, a reluctance to see how other people’s enrichment might be to our own advantage. Thirdly, a difficulty in accepting the notion of the lesser evil.

Let’s consider them in turn. Change-aversion explains, not only the pundits’ shock at the abandonment of the high-tax, low-interest-rate model, but also the immediate market reaction. Traders, like the rest of us, don’t like being caught off-guard, and the initial sterling sell-off confirmed the truism that markets hate uncertainty.

That sell-off has since been reversed, presumably as investors have taken a closer look at the fundamentals. With or without these changes, Britain still has the secondlowest national debt in the G7. Yes, the spike in energy prices is pushing up our borrowing. But that is a more serious problem for those countries (including almost every EU member) that do not supply a significant proportion of their own natural gas.

Britain is not an outlier in taking on more debt; but it is an outlier in announcing the supply-side reforms that central banks say they want.

As for the notion that the Treasury is in the hands of amateurs, that assertion has never been more absurd than now. The Chancellor wrote his doctoral thesis about an earlier currency crisis (the Great Recoinage of 1696). The Financial Secretary, Andrew Griffith, was a hugely successful chief financial officer at Sky. The Economic Secretary, Richard Fuller, spent decades as a management consultant and investor in Australia and the US. The Exchequer Secretary, Felicity Buchan, held senior posts with JP Morgan and Bank of America. Oh, and the PM herself is a qualified accountant with a background in energy.

The markets are already calming down, but the voters are not. Precisely because people are change-averse, almost any reform intended to deliver growth is unpopular in the short-term.

That brings us to the second cognitive bias, which the great economist Joseph Schumpeter called “the ineradicable prejudice that every action intended to serve the profit interest must be anti-social”.

It is depressingly easy to turn people against an otherwise desirable policy – more housing, say – by pointing out that someone will make money out of it. Prof Bryan Caplan of George Mason University calls it “anti-market bias”, and has shown that it is a constant across all eras and cultures. Voters persistently favour policies that make them poorer: nationalisations, rent controls, price controls, high taxation. As Caplan puts it in The Myth of the Rational Voter, “they focus on the motives of business, and neglect the discipline imposed by competition”.

This is most obvious in the reaction to the scrapping of the 45p top tax rate. Plenty of people will not be shaken from the view that the move is solely designed to help the rich. The idea that it might grow the economy, and so result in lower taxes for everyone else, requires an understanding that lower tax rates can lead to greater yields. That discovery was made more than 600 years ago by Ibn Khaldun, and has been shown to be true again and again; but it remains counterintuitive and therefore unpopular.

The same bias works against deregulation. Most voters assume that removing obstacles to enterprise is all about letting greedy corporations become even richer. In fact, a market system harnesses individual greed to general benefit. Adam Smith explained that while every man might be self-interested, “the study of his own advantage naturally, or rather

The markets are already calming down but the voters are not – precisely because people are change-averse

necessarily, leads him to prefer that employment which is most advantageous to the society”. But that notion, too, is counterintuitive and therefore unpopular.

So how, you might ask, do freemarketeers ever get elected? If our hunter-gatherer intuitions incline us against freedom, if they predispose us to see others’ success as coming at our expense, if they lead us to prefer control to spontaneous order, how is it that we have had more Conservative than Labour governments?

The answer is that, although we distrust the methods of capitalism, we generally like its results. Parties of the centre-Right tend, overall, to have a better record when it comes to prosperity. We might, when asked in isolation, say we want higher spending, more social protection and the rest – but we can’t help noticing that every Labour government in history has put unemployment up.

Ah, you say, but what if a centreRight government presides over an economic crisis? Why would anyone vote for the Conservatives at a time of rising taxes and rising prices?

This is where the third cognitive bias comes in: our refusal to consider the counterfactual. It sometimes happens in politics that all your options are sub-optimal. Do X and bad things will happen. Refrain from doing X and a different set of bad things will happen. Whichever you pick, you may be certain that the media, your political opponents and a large chunk of the electorate will point to those bad things as proof that you should have chosen the other.

Once the lockdowns were decreed, we were in a world of lesser evils. You cannot put an economy into an induced coma without lasting damage. You cannot keep printing money without a reckoning, and we printed more money in 2020 than in the whole of the previous decade. The reckoning is happening now, and not just in Britain. On every continent, inflation and bond yields are rising, even as governments dig yet deeper to fund energy packages.

Truss could have tried to keep the party going a little longer. She could have accepted the corporate consensus, favoured redistribution over growth and sought to keep interest rates down. She would doubtless have had a better reception from the BBC, the IMF, the FT, The Economist and Mark Carney. But all the problems that have been piling up since the lockdown – indeed, since quantitative easing began in March 2009 – would have grown heavier. The reckoning, when it came, would have been vastly more painful.

Grasping this truth requires us to acknowledge the existence of tradeoffs, of lesser evils. Yes, a rise in mortgage costs will be difficult for many; but keeping interest rates at historic lows for even longer would be worse. Yes, a fall in house prices will be disagreeable for homeowners. But keeping the bubble inflated for longer would be worse. Yes, spending cuts will be painful; but postponing the cuts will only make them more savage.

None of this will be popular. Do you remember, from school, those charts that placed people from far Left to far Right on the x-axis and from authoritarian to libertarian on the y-axis? Well, voters do not fall evenly into the four quarters. According to the British Election Study, only 2 per cent of voters are in the “libertarian Right” quarter – the group that is best disposed, in principle, to tax cuts, deregulation and small government. A budget offering these things was always going to be controversial when Britain’s political centre of gravity is a kind of patriotic socialism.

Perhaps, coming as it does at the very start of Truss’s premiership, the budget will define her image. Perhaps, like John Major after the ERM, she will find that her fortunes do not rise when GDP does

But there is a crucial difference. The economy grew after 1992 only as the result of Britain leaving the ERM. In other words, Britain recovered because John Major’s policy had been defeated, not because it had worked.

Suppose, by contrast, that Truss’s budget does work. Suppose that, in two years’ time, Britain is powering ahead, as targeted tax cuts stimulate incentives and as the supply-side reforms – easier fracking, investment zones, cheaper childcare and so on – encourage enterprise. Suppose that, by 2024, investment is pouring in, making us the envy of Europe. Perhaps even such a recovery would not give the Conservatives victory. But it is surely their best shot.