Any economics textbook will stress raising taxes and cutting government spending during a slump is just about the biggest policy error politicians can make.
That is seemingly what we are headed for now.
This week, new chancellor Jeremy Hunt delivered a damning eulogy of Trussonomics right in front of its creator.
Income tax cut gone. Self-employment tax reforms gone. Lower dividend taxes gone. That all came on top of Hunt forcing Truss to roll back on plans to reverse the six percentage point corporation tax hike (oh and a U-turn on ditching the top 45p rate of income tax on the eve of the Tory Party conference).
Liz Truss’s flagship two-year typical energy bill freeze was also cut significantly short. Brutal.
Despite setting alight the £45bn tax cutting mini-budget, Hunt now faces his toughest choices.
To meet the current fiscal rules of getting debt as a share of the economy falling in a few years, he needs to raise taxes or slash spending.
The Resolution Foundation reckon he must find around £30bn of savings before the “medium term fiscal plan” on 31 October. The Institute for Fiscal Studies agrees.
Former chancellor Rishi Sunak was able to avert a bad reaction in the financial markets to the Office for Budget Responsibility (OBR) routinely highlighting gaping holes in his fiscal plans by insisting spending splurges were temporary. His fiscal rules were also pretty flexible.
Hunt could do something similar by insisting taxes and spending cuts will come, just in two or three years.
That relatively obvious fiscal wizardry illustrates just how badly Truss and ex-chancellor Kwasi Kwarteng botched their blueprint for economic growth.
They set the public finances on a permanently unsustainable path, and did not need to.
There was nothing in last month’s fiscal statement showing borrowing would eventually fall, prompting the OBR to alert Truss and Kwarteng they were burning a £70bn hole in the public finances.
Austerity has been roundly slammed as the wrong response to the global financial crisis.
Inflation was low and stable, as were interest rates, a mix that should have compelled the Cameron and Osborne administration to invest in stimulating British productivity growth.
Yes, the UK’s debt stock swelled in the aftermath of the shock – just as it has post-pandemic – but that is not the only indicator policy makers should focus on during downturns.
Inflation is much a better ready reckoner that should guide economic policy. Right now, it is running at its highest level in 40 years, driven by an international energy shock and a tight jobs market.
Cutting taxes in that environment and hoping markets will respond gleefully is fanciful.
Investors do not like inflation as it erodes returns. That is why they ditched gilts, forcing yields higher.
Equally, there are tough trade offs involved in setting the level of government spending right now.
Before this week’s mini-budget reversal, Truss was set to oversee a much bigger reduction in real government spending than the Cameron and Osborne austerity years, according to Samuel Tombs, chief UK economist at Pantheon Macroeconomics.
Hunt’s tax cut U-turns will temper that by raising £32bn for the public coffers, but he has insisted nothing is off the table when it comes to scaling back the size of the state.
Public services right now are under intense pressure to maintain standards as their budgets are squeezed tighter and tighter by high inflation.
Viewed through a political lens, slashing public spending at a time when the NHS waiting list has hit a record high and there are wide gaps in living standards between regions of the UK could be the final nail in the coffin of the Tories’ election hopes.
From an economic point of view, the country is in desperate need of an investment drive to boost productivity and growth. The government can play a role in sparking that by supporting capital projects and businesses.
The problem is Truss has binned our credibility with investors, the exact people who lend us money to finance those projects.
Any sign of fiscal loosening may spark yet more turmoil on the foreign exchange and debt markets.
If it is to be Hunt-sponsored austerity 2.0, that is entirely the result of an awful policy mistake from the prime minister.