(Bloomberg) — Liz Truss’s economic plans have more in common with the man her party often ranks as its worst post-war prime minister than her idol Margaret Thatcher, according to a former chancellor of the exchequer.
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Norman Lamont, who was in charge of the Treasury during the Black Wednesday sterling crisis of 1992, said Truss’s plan to focus “entirely on growth,” has worrying echoes of the “dash for growth” under Ted Heath when he was premier from 1970 to 1974.
The “Barber Boom” during that period, named after Heath’s chancellor, Anthony Barber, ended in recession and soaring inflation, exacerbated by an oil shock. Like Heath, Prime Minister Truss plans to cut taxes, deregulate the financial sector and set a GDP growth target.
“It reminds me of Heath,” Lamont, chancellor from 1990 to 1993, said in an interview. “They put their foot on the accelerator and argued that growth begets confidence, which gets higher growth. It didn’t work.”
The challenges facing Truss and her chancellor Kwasi Kwarteng echo the 1970s: surging inflation, an energy crisis, industrial unrest and forecasts of recession. Heath is remembered for failing to grapple with Britain’s economic problems, capitulating to union power, losing the 1974 election and being replaced as party leader by Thatcher the following year.
Truss’s allies reject Lamont’s view. Gerard Lyons, an external adviser who is chief economic strategist at online wealth manager Netwealth, said: “There are no similarities. There are differences in circumstances and approach. This is a pro-growth strategy, not go-for-growth.”
Even so, the similarities are striking:
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Barber pushed through tax cuts in his 1972 budget. Truss has pledged £30 billion of income and corporation tax cuts.
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Barber targeted 5% annual growth. Truss has set a 2.5% goal, well above the 1.5% average of the last decade.
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Barber liberalized credit. Kwarteng has promised to unleash “Big Bang 2” in the City of London, with sweeping reform to financial regulations.
UK economists are skeptical about Truss’s plans. They fear her growth target can only be achieved by overheating the economy and stoking inflation. Like the prime minister, Lyons, who is expected to be a senior figure on her council of economic advisers, believes one of the problems is the Treasury’s innate pessimism.
“The real issue is we have got ourselves into this Treasury orthodoxy where we think we’re a low growth economy, therefore more of the budget deficit is structural,” he said on the “What the H£ll is Economics?” podcast with his daughter, the comedian Elf Lyons.
“That implies the government should keep spending tighter or raise taxes more. The answer to the problem is to turn the issue on its head and say, what do we need to do to grow the economy?”
Budget discipline is vital for sustainable growth, Lyons believes, but targeting strong growth is a better approach than raising taxes. He suggested he would like Treasury models to assume a larger economic response to fiscal policy.
“Like all forecasts, there are huge ranges of error,” in official projections, Lyons said when asked if the current models work. “There has already been an evolution” in the models, he added.
The Treasury’s Green Book, used to determine how best to invest taxpayer money, was recently reformed because its cost-benefit model used past performance to predict the future. As a result, it underestimated the transformative power of investing in poorly performing places.
Truss sent a strong signal that she wants a different mindset at the Treasury by sacking Tom Scholar, the department’s permanent secretary in her second day of the job.
Contenders to succeed Scholar are all Treasury outsiders and include Tamara Finkelstein, permanent secretary at the Department for Environment, Food and Rural Affairs, James Bowler, permanent secretary at the Department for International Trade, and Antonia Romeo, permanent secretary at the Ministry of Justice.
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