Whatever else it may have been, this was not economics.
The fact that Kwasi Kwarteng’s “mini-Budget” was an absolute whopper—with the largest tax cuts in a half a century—was merely the start of the incoherence.
Many commentators, myself included, had listened to Liz Truss during the Tory leadership election and suggested she represented a sort of turbo-charged late Thatcherism. But that was before her move to completely switch off market forces in the energy sector, shielding every household from all the impending price rises, over not one winter but two.
A supposed laissez-faire lion, and co-author with Truss of the marketopian Britannia Unchained, Kwarteng now stood at the despatch box and boasted of “one of the most significant interventions the British state has ever made.” Just like Old Labour did between the two elections of 1974 (a year before inflation peaked at over 20 per cent) he offered his subsidies as paving a way back towards price stability.
As for the public finances, Truss and Kwarteng both arrived in parliament in 2010 when net national debt was around 65 per cent of GDP. Both clambered up the greasy pole under a regime which held this debt up as the gravest of all threats to national prosperity, and defined itself through a mission to get it down through austerity. Today, public debt is running at approximately 95 per cent of GDP, and—fresh from grabbing the levers of power—Truss and Kwarteng have now decided to ramp it up to well over 100 per cent. (Admittedly, I’m having to rely on my own calculations here, as the chancellor has declined the Office for Budget Responsibility’s offer to update their numbers and refused to let them publish the work they have done so far. But it surely seems fair to guess that he’d have been more relaxed about it seeing the light of day if their verdict had been positive.)
With an economy sinking into recession, there might have been a pragmatic case for loosening the purse strings and pumping in some demand. The argument is far weaker than it was in 2008—inflation is rampant, pressure is building in various post-lockdown bottlenecks and borrowing costs are no longer on the floor but rising fast. Nonetheless, before I listened to the detail of Kwarteng’s plans, I half-expected to be writing a piece recalling Richard Nixon’s “we’re all Keynesians now” conversion, and weighing the dilemmas for the left as the right finally took its advice, and pressed hard on the accelerator.
But having listened the speech, Kwarteng’s proclaimed “new era” doesn’t—despite the ubiquitous commentary—feel like a serious play for growth at all. I say that, first, on technical grounds. During the summer, both Truss and Kwarteng complained that the Bank of England had proved unequal to their task of controlling inflation. But now they have decided to make that task considerably harder, by pencilling in a staggering £45bn in tax cuts for 2026-27, a time by which they are hoping both the energy crisis and the associated slump will have passed. They know full well this will increase projected inflation a few years out, and furthermore that it will leave the Bank feeling forced to slam on the brakes even harder than it already has. God only knows what they expect will result from their accelerator and the Bank’s brake being pushed so hard at once.
Moreover, the way they have decided to dish out this largesse looks to have much less to do with growing the economy as a whole than swelling the biggest bank accounts. Before its current muzzling, the OBR published estimates of so-called “fiscal multipliers”, guides as to how various expansionary government moves would translate into growth across the wider economy. These showed that a given volume of public investment would be expected to unleash far more expansion than the equivalent giveaway in tax.
If that is true of tax cuts in general, today’s decision to channel over a third of the total giveaway in corporation tax cuts could be especially inefficient: that money will be concentrated on the firms which are already the most profitable, and perhaps the least likely to be constrained in investing. Ministers are sent on to the radio to suggest that the change will unleash an economy so strong it can easily fund better public services. And yet the Treasury’s own numbers today pencil in a hit to the Exchequer of £19bn from this one move by 2026-27.
Beyond the technicalities, what we are seeing is not a dash for growth, but a dash to enrich those who already have most. Poorer Britain remains, even with the energy price freeze, in the grip of a savage cost-of-living crisis; this week the Joseph Rowntree Foundation highlighted the £450 shortfall that the hardest-pressed families confront this year, as a result of mismatches in the sequencing of the annual adjustment of benefits for inflation and various energy relief measures. Needless to say, if the focus had been on bailing these people out, they really would—because they need it for the essentials—have spent it rapidly, a fill-up for economic demand.
Instead, what did we get? The abolition of the top tax rate, squarely targeted on the top 1 per cent, worth roughly £50,000 annually to the tiny elite on £1 million a year. The abolition of Stamp Duty for those first-time buyers who can afford to move straight into a £425,000 pad. A stubborn refusal to tax the continuing windfall gains of the energy giants, who are having such a terrific Ukraine war. A cut in the tax on dividends, and—last but not least—the removal of a cap on bankers' bonuses which had been imposed to check their temptation to gamble with other peoples’ money.
All this, purportedly, to establish Britain as a great place to invest and succeed. And yet within an hour of Kwarteng sitting down, the markets had pushed the pound down to a 37-year low. Combined with a nakedly plutocratic agenda, that immediate vote of no confidence from the markets offers Labour a wide-open goal. Shadow chancellor Rachel Reeves was strong on decrying the indulgence of energy profits, but seemed less keen to focus on the breathtaking top income tax cut.
The opposition needs to come out hard against this—and soon—or it could, in the fire of an election campaign, find itself trapped by New Labour shibboleths about “no rises in income tax rates”. Neither the angry public mood—nor the battered public finances—are in a condition where the old taboos of the 1990s make any sense.
After this audacious statement in “trickle up” public policy, we are indeed in for a “New Era”. Though not, perhaps, in the way that Truss or Kwarteng imagine.
