Fresh from imitating Margaret Thatcher, the Foreign Secretary has decided to also ape Winston Churchill. This was apparent in her recent Mansion House speech, which was only an ‘Iron Curtain’ or two away from being as much a clarion call against Russian perfidiousness in Eastern Europe for the ages as the great man’s comments at Westminster College, Missouri.
But it also comes from her reported desire to see the £400 billion in debt which the our pandemic response has cost us being hived off into a separate debt pool and paid off much more slowly, in an imitation of what Britain did with its war debts.
Of course, anyone who knows anything about modern British history knows that Churchill was promptly booted out of office after the Second World War – if only because the Left’s myth of the 1945 Labour government has had as debilitating a consequence for our national memory as the Right’s fondness for the Battle of Britain.
Nevertheless, Churchill was Chancellor in the 1920s, and in 1927 refinanced First World War debts into ‘consols’ – government securities without a fixed repayment date – something which the good folk at the Adam Smith Institute have highlighted.
Moreover, it has been a common point made since the start of the pandemic, by notable voices such as Nicky Morgan and Anthony Browne, that the debt incurred by the Covid pandemic is a one-off, and should be treated as such. Rather than representing the sort of day-to-day burden heaped on our finances by Gordon Brown’s expansion of the state, which necessitated the austerity program of 2010-2016, this debt mirrors that of the World Wars in being unexpected but necessary additional borrowing.
With public sector debt having peaked at over 100 percent of GDP during the pandemic, reaching its highest levels since a time when government scandals were genuinely interesting, there is an obvious appeal to this approach.
Accordingly, Truss’s comment suggests we should aim to deal with this debt as we did that of the Second World War, rather than the First. In the 1920s, our recovery was checked by high interest rates and a scaling back of spending – a Keynesian’s worst nightmare, had such a thing then existed.
By contrast, after the Second World War – by which time everyone had read the works of the only Bloomsbury resident even more tedious than Virginia Woolf – we grew ourselves out of a national debt that peaked at 250-odd percent of GDP in the early 1950s through steady growth (and the occasional judicious inflation).
So all this gets an A* from a noted tax-cutter keen to promote economic expansion. It also unites various corners of the Tory economic tribe. For those of a more One-Nation or Red-Wall-y hue who want to persist with more borrowing to finance ‘levelling up’, kicking debt into the long grass to borrow more now makes sense.
It also has obvious merits for those who sip from the IEA or Telegraph cup, demanding tax cuts and a dash for growth now. And it has a very definite appeal for a Foreign Secretary who wants to outflank her Eyeore-ish competitors on a question to Number 11 – or 10.
Nevertheless, although one hates to be the bearer of bad news, Truss’s ideas have some serious flaws. When these ideas were first floated two years ago, they were explicitly based on a continuing environment of low interest rates and low inflation, and in the expectation of bounce-back growth post-pandemic.
Although, as Churchill said of the Americans, they may have tried all other options first, the Bank of England has finally got around to realising that inflation will easily top ten percent, and that interest rates must rise accordingly. As inflation spikes, Ukraine burns, and China continues to open-and-shut like a clam on Speed, predictions of roaring growth this year have been cancelled.
As such, we lack the immediate ability to grow our debt away as we did in the post-war decades of 2.5+ percent growth and small budget surpluses – especially as the amount spend on debt-servicing costs has quadrupled. Unfortunately for Truss, much of our debt is already long-term in nature, and a significant proportion of it is index-linked. How ever much of it we might shunt out of sight, it still needs to be paid, and it is only going to get more expensive to do so.
Plus, the ASI’s suggestion we pay off the debt whenever we feel like it is rather eyebrow-raising. Not only did we pay off the last of our outstanding ‘consol’ debt in 2015, but imitating a policy used first in the War of Austrian Succession is not exactly what the markets will be looking for right now.
Consequently, the Foreign Secretary must face the painful reality that the only way out of our looming stagflation is either through immediate cuts to spending or via the pursuit of a growth-minded supply-side agenda. Her ideas are a non-starter, since MPs have axed this Government’s only major example of the latter in housing reform – now shamelessly blaming it for last week’s performance at the ballot box – and austerity hardly seems politically palatable. Perhaps she should stick to her day job then – looking imposing on Instagram, and pushing the West increasingly close to a nuclear exchange with Russia.