Three things we learnt from Liz Truss’s speech at the IfG

This week, in a speech at the IfG, former prime minister Liz Truss set out her vision for how the UK could achieve faster economic growth – and revisited some of the decisions she made in office, including her disastrous mini-budget. This time last year, the IfG was warning about the potential consequences of the then prime minister departing from many of the norms of good government, including the use of institutions, the value of parliamentary scrutiny and the need for a strong evidence base for policy.  

A year on, we put our arguments to the former PM. This is what we have concluded from her response.  

1. Truss’s proposed cuts would cause further deterioration in the performance of public services 

One of Truss’s key claims in her speech was that Sunak had overspent on public services since he succeeded her in No10. But as previous Institute for Government work shows, even with additional government spending commitments, public services are struggling and have not returned to pre-pandemic performance levels. NHS waiting lists are at record levels. Pupil attainment gaps are widening. Not raising spending on those services – as Truss advocated – would almost certainly have led to an unacceptable deterioration in performance. Had she remained in office, it is likely that Truss would have fallen into the same pattern as her predecessors and her successor: funnelling money to public services only at the point that poor performance generated damaging headlines – managing crises rather than setting them on a longer-term path to improvement.  

Truss acknowledged that operating a health service would always be expensive, but argued that reform – in particular decentralisation of decision making – could generate savings. There are efficiencies to be realised across public services, but almost all of these require upfront investment, either in capital, better management capacity, a more highly trained workforce, or a shift to preventative services. If relatively low-cost structural reform of services worked, then the multiple reshuffling of constituent organisations that recent governments have put the NHS through would have had more impact. 

2. Truss’s critique of the OBR is largely unfair, although she identifies a valid weakness in long term forecasting 

Last autumn, the Institute for Government criticised the Truss government for refusing an offer from the Office for Budget Responsibility (OBR), the government’s independent forecaster, to produce a full forecast alongside her mini-budget. Truss’s decision to reject a role for the OBR was widely seen as an indication that her government was unwilling to listen to challenge or to acknowledge the difficult trade-offs inherent in government financial decisions.  

Truss argued in her speech that many, larger announcements during the coronavirus pandemic, including the creation of the furlough scheme, had happened without an accompanying OBR document. This is correct but these measures were of a different nature to the mini-budget. Covid and energy crisis response schemes were temporary measures that needed to be developed, announced and implemented at speed, with no time for the OBR to produce a full forecast. In contrast, the mini-budget set out permanent changes to the tax system. Truss’s tax changes could easily have waited until later in the autumn to be presented alongside full spending plans and an OBR forecast to demonstrate they were fiscally sustainable.  

In her speech, Truss also criticised the OBR, and other economic commentators, for analysing policies in a way that is too ‘static’, claiming this made policies like cuts to corporation tax and income tax appear more expensive than they would have been. This critique is unfair. The OBR does factor into its forecasts reasonable estimates of how tax changes are likely to affect wider economic activity if there is a sufficiently strong evidence base to suggest that a policy will have wider behavioural and economic impacts. Just this March, the OBR upgraded its forecast for the size of the labour force as a result of government policies on childcare, social security and pensions. The problem with Truss’s mini-budget policies was that the OBR did not believe there was a strong evidence base to justify upgrading the five-year economic forecast. For example, the available evidence does not show a clear relationship between lower corporation tax rates and economic growth. ⁴ How not to run a government: the lessons from Liz Truss's first 40 days | Institute for Government  

Truss’s further critique of the way in which supply side effects of policies are assessed and spelt out in the policy making process was more legitimate. She has rightly recognised that our current forecasting setup does not fully account for the long-term economic effects of policies. However, she is wrong to suggest a different approach would have substantially changed the perceived impact of the mini budget over the next few years.  The problem she identified – of how politicians can get credit where there is evidence of longer-term benefits from policies aimed at the longer-term – could be addressed by amending the forecast horizon, perhaps extending it to ten years, or by the OBR providing supplementary information, alongside its five-year forecast, setting out its view of the likely longer-term supply side effects for relevant policies. The length of the forecast horizon is chosen by the chancellor.  

3. There is a disconnect between Truss’s problem diagnosis and prescription of solutions 

In her speech, Truss again set out a case that radical reforms of the supply side of the economy are needed to boost growth and thus living standards. She highlighted various specific areas that she believes are standing in the way of economic activity: the very high marginal rate of tax facing those with earnings just over £100,000; the high costs of welfare and pensions; high public spending in general; and excessive regulation in housing and energy markets, among others.  

Truss is right to say that the UK tax system is riddled with complexity and inefficiency, as we and others have previously outlined – including the 60% marginal rate of income tax facing those with incomes between £100,000 and around £125,000. But the policies set out in Kwasi Kwarteng’s ‘mini-budget’ did not address these. Instead, they made changes to headline tax rates – corporation tax and the additional rate of income tax. Truss pointed to her abandonment of IR35 rules as an example of simplifying tax rules for the self-employed – but that legislation (which simply seeks to help enforce existing tax liabilities, rather than change them) is only needed because the UK tax system taxes self-employment and employment income differently. Her change involved no simplification.

In these and other examples – failing to put forward any proposals to cut public spending or to prioritise planning reform – there is a disconnect between the arguments Truss makes and the policies she pursued in office.