The new Chancellor Kwasi Kwarteng announced a new package of economic measures this weekend aiming to grow the economy and lessen the energy crisis before winter. However, confidence in the government’s new plan is remarkably low, and there are very few economists or politicians outside the Tory party who have a positive outlook on Kwarteng’s ‘mini-budget’.
The most notable parts of Kwarteng’s announcement were; an energy price guarantee to limit energy bills to £2,500 for the average household, scrapping the 45% additional tax band for high earners, cutting basic income tax rate from 20% to 19%, cancelling the 1.25% national insurance increase, corporation tax will remain at 19%, stamp duty threshold will be increased to £250,000 and to £425,000 for first time buyers, simplification of IR35 rules, and removing the cap on banker’s bonuses.
The announcement was the most consequential and controversial that we have seen from a Chancellor in years, having more impact than most full budgets released by the Tories. As the Chancellor made his statement, Sterling plummeted abruptly against the dollar by a full cent, and has recently reached a historic low point against the dollar; $1.03, and is still struggling to recover.
The currency markets have reacted in this way because of the Government’s plan to pay for these tax rises; they intend to borrow huge sums to cover the cost, which will surely lead to increased interest rates from the Bank of England, perhaps as high as 3.75%. The cost of borrowing has already increased alarmingly, and borrowing at the level Kwarteng has proposed will add billions more to the UK’s debt for future taxpayers to deal with. If plans for an extension on the energy profits windfall tax was proposed to fund these cuts, the markets would have reacted far more positively to this announcement.
There are many infuriating things about these developments. I have voiced my opposition to the Truss plan of tax cuts to combat growing poverty before; poorer people pay less taxes, so will not benefit as much as rich people from a cut. But beyond this, these cuts seem to deliberately benefit the most wealthy in society. The national insurance cut alone saves those on £20,000 around £93/year, but those on around £100,000 save almost £1,100/year. This seems like the new Conservative government ignoring the current circumstances and reverting to ideology. This is classic low-tax, Tory trickle-down economics, pure and simple, and will do nothing but exacerbate income inequality and energy poverty as we move through the cost of living crisis.
Moreover, the independent OBR (Office for Budget Responsibility), who usually release economic forecasts alongside budget announcements or similar announcements, were prevented by the Government from doing so on this occasion. To have an economic statement of the magnitude of this “mini-budget” without a simultaneously released independent forecast from the OBR is completely unprecedented. To borrow this much and offer such little explanation to support, means the markets are right to be freaking out right now.
Truss and Kwarteng have taken a massive gamble here; cut tax, make the wealthy wealthier, lessen business regulations, and after that, just hope it leads to growth because that’s what their ideology teaches. The Tories have been in power for more than 12 years now, and Kwarteng’s promises of a “new era” (rightly met with laughter from opposition benches in the Commons) disregard all the supposed ‘progress’ made by previous governments. Truss and Kwarteng are effectively trashing the record of more than a decade of Conservative economics with these drastic measures, and then introducing remarkably familiar policies claiming they are starting anew.
The Conservatives are rapidly losing their reputation for fiscal responsibility. There have now been six plans for growth released by successive Tory governments since 2010, and none have been anywhere near as effective as hoped. This most recent one will fail also. One of Kwarteng’s first acts as Chancellor was to sack the Treasury’s independent permanent secretary, and the Government is consistently at odds with the Bank of England over It’s fiscal policy. And now, before the release of this incredibly consequential change in policy, it is blocking the OBR’s independent review.
It is plainly clear now that fresh ideology is needed to grow the economy; Conservative economics have widened inequality, stoked class division, devalued the pound by historic levels, and pushed interest rates and Government borrowing rates to their highest point in years. Every conservative trick in the book has been trialled. The only way out of this pit of stagflation are elections, a change of thinking at the very top. For variety’s sake if nothing else.
stay safe
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