The first major fiscal intervention by a new prime minister has surely never been greeted with such widespread disdain. Less than three weeks into Liz Truss’s premiership, her new chancellor, Kwasi Kwarteng, announced the biggest programme of tax cuts in half a century, one that will benefit the very wealthiest while adding tens of billions to the national debt. The market reaction was instantaneous: the pound dropped to its lowest level against the dollar since 1985. The “growth plan” was rubbished by thinktanks such as the Institute for Fiscal Studies. Backbench Conservatives lambasted the plan as “economically dubious”. And Larry Summers, the former US Treasury secretary, accused the UK of behaving like an “emerging market turning into a submerging market”.
Those are just verdicts on the substance of Friday’s remarkable announcements. The UK economy is suffering as a result of the global energy price shock and a decade of poor productivity growth, made worse by erecting huge barriers to trade with the EU. These circumstances are making everyone poorer, with particularly deleterious consequences for low-income households with children, people with disabilities and poor pensioners. What is desperately needed is urgent support targeted at the hardest-hit households, plus the investment in skills, infrastructure and business finance to rebalance the economy away from growth based on consumer spending, fuelled by rising house prices, and towards business investment and exports.
Instead, Kwarteng has announced a set of tax cuts that channel huge gains to the very richest and a scattergun plan for deregulating the economy. Despite the fact that this is a hugely significant fiscal intervention, he has prevented the independent Office for Budget Responsibility from producing its own forecasts, implausibly claiming his measures will put the UK on a path to trend growth of 2.5%. But – quack economics aside – there is no plausible theory of change that links Kwarteng’s tax cuts to such buoyant growth. They will make us poorer as the debt burden balloons.
The tax cuts will have terrible consequences for levels of inequality and poverty in Britain. Even before the energy price crisis, low-income households faced a grim reckoning: a decade of cuts to tax credits by Conservative chancellors, which paid for tax cuts disproportionately benefiting the more affluent, has ripped open the financial safety net so important for low-paid parents to keep children out of poverty. Households in receipt of universal credit will be almost £1,500 a year worse off from October as a result of inflation and rising energy prices. The Resolution Foundation has forecast that, taking into account yesterday’s announcements, another 700,000 children will be living in poverty in two years’ time, with consequences for their education, health and employment for the rest of their lives.
Meanwhile, it is the richest who stand to gain most from last week’s announcements, including the scrapping of the 45% tax rate and the cap on bankers’ bonuses. People with incomes of less than £155,000 will pay more income tax from next April; those on more than this will gain, often substantially: someone with an annual income of more than £1m will be more than £40,000 a year better off. Households in the top 5% of wealth distribution will gain, on average, more than £8,000 a year as a result of Kwarteng’s changes; those in the poorest 10% get nothing. That would equate to providing support of £2,000 for every household among the poorest 20%, which would do far more to boost growth given that the wealthy are more likely to save the rewards they gain. As a result of Kwarteng’s fiscal loosening, the Bank of England is almost certain to hike interest rates even further in the coming weeks, inflicting further pain on those with mortgages or in debt. And, when the promised growth fails to materialise, this is likely to push ministers towards cutting public service budgets further, even as NHS and school finances are already under severe strain.
There is no democratic mandate for this package: Truss has never won a general election and the measures mark a huge shift from the 2019 manifesto. But the Kwarteng package is the oft hoped-for destination of the hard-right Tory flank. For them, Brexit was always a means to an end: to slash taxes and regulations to a degree that evaded even Margaret Thatcher. But there is nothing Conservative about giving unnecessary handouts to the rich and burdening those in their 20s and 30s with the cost of financing the extraordinary rise in the national debt for the rest of their working lives. No country has successfully achieved growth through these means. The “Singapore-on-Thames” fantasy of Conservative Brexiters is just that: Singapore is a tiny, authoritarian city state that spends a great deal on its highly active industrial policy. One academic study of 18 OECD economies found that tax cuts do nothing for growth and instead increase income inequality.
Truss and Kwarteng’s ideological approach creates a significant chance for Labour to show it has an alternative economic vision for Britain at its party conference this week. Keir Starmer has said that Labour would invest in making Britain self-sufficient in electricity by 2030, by boosting renewable sources of energy, and that is exactly the bold thinking the country needs. But the terrible truth is that whoever wins the next election will inherit one of the worst-ever economic outlooks as a product of Truss’s brazen, ideological experiment. It will cost the country dear.
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