The Conservative Party have now been in power in the UK for 12 years. Over that time huge economic and social problems have emerged. It is clear that the UK needs a change in direction.
And this is what Truss and Kwarteng promised. They have now shown very clearly how they intend to tackle these issues, first in their response to the energy price crisis and now in the Budget.
What does the Budget do?
The Budget is enormously radical but in exactly the wrong way: it is the first Budget to end the pretence of governing for the benefit of UK citizens as a whole:
- Johnson and Sunak constantly talked about levelling up and uniting the country;
- Truss and Kwarteng have had enough of worrying about the middle and poorer classes and are not trying to hide it; and
- Their Budget will weaken the economy to almost everyone’s detriment.
It is very clear that this Budget does not produce the change in direction the country needs, it is a dangerous doubling-down on the failed policies of the past, without even an attempt to safeguard most UK citizens. We should apply maximum pressure to the government to force a U-turn.
Johnson and Sunak talked about levelling up and uniting the country
Johnson repeatedly called levelling-up the ‘defining mission’ of his government and spoke eloquently about the gap between rich and poor:
“We have one of the most imbalanced societies and lopsided economies of all the richer countries … What monkey glands are they applying in Ribble Valley, what royal jelly are they eating, that they live seven years longer than the people of Blackpool only 33 miles away?”
And Sunak also claimed to be on-side: he created a £4 billion ‘Levelling-up Fund’ claiming that it would be “a new, holistic, place-based approach” to funding community projects and programmes which would level up and reduce these inequalities.
But at least Johnson and Sunak paid lip-service to the idea of looking after those who need it most, and the thought of leaving them without support remained outside the Overton window.
Truss and Kwarteng have decided to focus on rewarding the wealthy
All that has changed with Truss and Kwarteng.
Truss explained her philosophy:
“But to look at everything through the lens of redistribution, I believe, is wrong. Because what I’m about is growing the economy. And growing the economy benefits everybody. So far, the economic debate for the past 20 years has been dominated by discussions about distribution. But what’s happened is that we have had relatively low growth.”
“for too long in this country we’ve indulged in a fight over redistribution”
The reality is that for the last 40 years, there has been steady redistribution – but from poor and middle-class to the rich.
So where does Truss’s philosophy come from? As we wrote recently, the extreme right-wing Tufton Street think tanks have nurtured almost all of today’s cabinet. And this Budget demonstrates their impact very clearly.
Tim Montgomerie – founder of the ConservativeHome website – explained, referring to the Institute for Economic Affairs (IEA: a think tank that, among other things, wants to abolish the NHS):
And, unsurprisingly, the IEA defended the Budget though even they admitted that:
“If all you care about is the distributional impact of the tax cuts in the next 24 [pause] weeks, you’re not going to like this package if you care more about the poor.”
Serious commentators have agreed on this point. The Institute for Fiscal Studies pointed out that, taking into account all the tax changes coming in over the next few years,
“if your income is less than £155,000, you lose; if your income is over £155,000 you win; and if your income is over £1,000,000 you gain more than £40,000.”
And the Resolution Foundation added:
“Middle income Britain stands to lose most from the overall impact of all tax and benefit policies announced over the parliament. The poorest fifth of households gain £90 on average, with the middle fifth losing £780, and only the top five per cent gaining significantly (£2,520).”
They also showed this assault on the poor and middle classes graphically:
Truss has said that she is prepared to be unpopular, and justifies this attack on the finances of normal people on the grounds that it will ‘grow the economy.’
This budget will make the economy weaker
All the evidence, and virtually all expert opinion, suggests that far from spurring growth, the Budget is highly damaging to the economy.
What Kwarteng and Truss are banking on is the idea that growth in the UK is held back by two things:
- There are insufficient incentives for the wealthy and so they have been reluctant to invest in growth; and
- There is excessive regulation.
Let us take these claims in turn. First, as we saw above, the evidence is that the wealthy have been taking an increasing share of the nation’s wealth – hardly evidence of lack of incentive. More importantly, Truss claims that tax is inimical to growth. This is a common trope among the far right: as Trump’s adviser Peter Ferrara put it:
“…penalizing investors, successful entrepreneurs and job creators with higher taxes, to reward the less productive … to make everyone more equal, is a sure-fire way to get less productivity, fewer jobs, lower wages and reduced economic growth.”
If this “sure-fire” effect were real, it would show up in the data. What the data in fact show is rather different.
Source: Maddison, IRS, Dynan, Skinner & Zeldes; 99% analysis
Higher taxes in fact correlate with higher growth. How can this be? Governments tend to spend the money they take in as taxes. Furthermore, the beneficiaries of that spending are the entire population, not just the very wealthy. Whether directly (eg in wages and salaries) or indirectly (eg in expensive healthcare that we do not pay for out-of-pocket), government spending puts money into the pockets of normal people.
And normal people spend it whereas rich people save. A pound in the hands of a poor person gets spent very quickly, adding to demand in the economy and signalling to businesses that it is time to grow; a pound given to the wealthy often gets saved. The distributional impact of this Budget is anti-growth.
What about deregulation? Will that unchain Britannia? Sadly not – any growth it does enable would almost certainly be bad growth. How do we know this? Well, regulations are introduced for a reason: to prevent businesses from doing things that are detrimental to the public good. In principle, they are not allowed to lie to us in their advertisements; they are not allowed to mis-sell us financial products; they are not allowed to pollute the environment. If they are bankers, they are not allowed to run their banks in a way which exposes them to risk of failure (and causes them to be bailed-out at enormous public expense, as happened after the Global Financial Crisis).
This red tape, in other words, has a purpose: to protect the public. Slashing these regulations would only enable a few unscrupulous businesses to grow at the expense of ordinary people.
Of course, those drafting regulations are human and not all regulations are optimally constructed. But the idea that reversing the ban on fracking in the teeth of a climate emergency, or reducing regulation of the City when we have still not recovered from the Global Financial Crisis, will produce good growth is simply not credible.
So, the evidence does not suggest this Budget will produce growth. And expert opinion follows the evidence.
As Chris Giles, Economics editor of The Financial Times, wrote,
“Economists are rarely united, but the vast majority agreed on Friday that Kwasi Kwarteng’s fiscal package was built on borrowing and hoping that things turn out for the best. They expected the new chancellor’s hopes to be dashed. … Most economists said the Budget was therefore highly risky and — due to the higher borrowing costs — unlikely to encourage companies to borrow and invest.”
And as Ruth Gregory, senior UK economist at Capital Economics said, unless the gamble to boost the underlying growth rate works,
“today’s fiscal package just means more inflation, higher interest rates and a higher debt ratio in the future.”
For market fundamentalists like Truss and Kwarteng, the reaction of the markets to the Budget must have come as a shock: the pound has fallen to a 37-year low against the dollar and the stock market is plunging with it.
Martin Wolf summarised the Budget clinically in the Financial Times,
“Kwarteng also decided to cut the top rate of income tax back to 40 per cent from 45 per cent. Is there any reason to suppose that this will release waves of entrepreneurship? Under Thatcher, the top rate was slashed from 80 per cent to 40 per cent. It is debatable whether even that improved performance significantly. This mouse of a change surely cannot do so. That is even truer of the cut in the basic rate from 20 per cent to 19 per cent. For economic performance, these changes are totemic, not real. For income distribution, however, they will be perfectly real, not totemic. …
In sum, this mini-Budget will do nigh on nothing to raise medium-term growth, but risks serious macroeconomic instability. The failure to ask the Office for Budget Responsibility to assess its impact is simply scandalous. This government may be indifferent to painful reality. But reality usually wins in the end.”
We should force a U-turn
This Budget is too harmful to ignore. And many members of the Conservative Party are aware of this fact. Speaking, for the most part anonymously, Conservative MPs said:
“It’s the richest we’re helping while the poorest are suffering the most.”
“I completely despair, because I’m a member of a party that stands up for the squeezed middle, not the very rich. This will be politically toxic and economically dubious.”
“I’ve never known a government that has had so little support from its own backbenches, just four sitting days in.”
A few spoke openly: Mel Stride, the chair of the Treasury select committee and former campaign manager for Rishi Sunak’s leadership bid, said there was a “vast void” in the mini-budget, and Sir Roger Gale commented:
“Fortune favours the brave, but not the foolhardy: [this] not-so-mini-budget is certainly brave but also looks very high risk indeed.”
For many Conservative MPs, this Budget offends their sense of what is right; and it also undermines their chances of re-election. This is therefore a time when writing to your MP can be very powerful. You may not see the effect immediately, but we know from recent episodes (most notably, the decision of MPs to unseat Johnson) that a large volume of letters and a shift in the polls does produce important results.
If you would like to write, these notes will help (and make it quick and easy).
And please join up and become a member of the 99% Organisation.