The UK government may have just made me richer. For how long, I’m not sure. Even if Britain’s bonfire of fiscal rules doesn’t lead to a run on the pound, it’s hard to see how my children can end up more prosperous. An iceberg of borrowing lurks beneath the bonanza of unfunded tax cuts announced by the chancellor.
This was a railroading budget, an electioneering budget, rammed through a raucous House of Commons with a bristling swank. Kwasi Kwarteng has never seemed further from his gentle PhD in economic history. As his opposite number Rachel Reeves gamely tried to react, Pat McFadden, shadow chief secretary to the Treasury, looked ashen. So did Paul Johnson, the usually unflappable director of the Institute for Fiscal Studies, who had to give instant comment moments later.
These are sober people who worry about institutional stability and the impact that a massive stimulus could have on inflation. But warning people that the revelry might lead to a hangover can lead to you being framed as a party pooper.
Part of me admires the chutzpah of a prime minister who is signalling an entirely new administration, clearing away the orthodoxies she thinks are holding Britain back. Liz Truss espouses a brand of Conservatism which loathes Treasury “managerialism”, and is desperate to raise sluggish national productivity. I salute the decisions to finally talk seriously about tax simplification, reform the pensions charge cap to stop doctors fleeing the NHS, face down Nimbys over onshore wind farms and end the egregious IR35 rule on freelancers.
The bigger part of me, however, is consumed by fury at the sleight of hand. By calling this huge fiscal event a “mini-budget”, the chancellor has got away without a forecast from the Office for Budget Responsibility. But that means that we have been kept in the dark about the borrowing implications. The energy price guarantee announced earlier this month was urgent, but there was no reason to deliver this budget so fast without scrutiny — especially since the energy package was essentially a blank cheque.
Ministers clearly want to gain political momentum, and boost business and consumer confidence, in what feels like an overdue acknowledgment that Brexit has shackled our economy. But markets may not like the disregard for institutional norms or sound money principles. The early signs are not good: the pound hit a 37-year low on Friday, as borrowing costs surged. Although other western nations have also run up big deficits during the pandemic, they are not pushing the boat out like this, and Britain remains horribly reliant on the kindness of strangers for our borrowing, against a backdrop of market anxiety, rising interest rates and protectionism.
Truss’s aides have made much of the fact that she has never been afraid to be unpopular — which is a welcome change from her predecessor, Boris Johnson. But this package is likely to be very popular in the short-term, since it delivers huge tax cuts and dodges the difficult questions of how it will all be paid for.
Despite the claims made during the Tory leadership contest Truss certainly isn’t the reincarnation of Margaret Thatcher, who believed in balanced budgets. She’s closer to Ronald Reagan, who delivered a mammoth tax cut in 1981 at a time when inflation and interest rates were high. The difference, of course, was that Reagan was acting at a time when the US workforce was growing and the dollar, a reserve currency, was strengthening.
Can the measures announced by Kwarteng get us to the ambitious target of 2.5 per cent growth? It doesn’t feel like it. Stamp duty has certainly put a brake on mobility by making people reluctant to move house. But upping the threshold won’t get more houses built. Investment zones generally tend to move growth around between different places rather than having a significant impact on national productivity. Deregulation may encourage more clever entrepreneurs to come to Britain, and bolster the City’s status as a world financial centre, which would be a good thing. But the bigger picture is that the UK workforce isn’t growing, and too many people aren’t seeking work at all.
Logically, spending cuts must come eventually. Unless you believe that tax cuts pay for themselves, which I don’t, something will have to give. Truss has already committed to raising defence spending. I wouldn’t be surprised if she slashes HS2, and other infrastructure including the 40 new hospitals which Boris Johnson boasted of but which are not all needed. The fact that deputy prime minister Thérèse Coffey was previously secretary of state for work and pensions makes me wonder if we will also see reforms to welfare. But all these things, which might be rather less popular, are under wraps.
Who gains from the chancellor’s package? Most obviously high earners, financiers who’ve been shorting sterling, foreigners who buy London property and people with very large homes who are now being paid to keep wasting heat. Who will pay? The next generation. That’s if inflation doesn’t wash us all away long before.
One thing is clear. The stage is set for a head-on battle between the Treasury and the Bank of England, as the government demands growth and the Bank raises interest rates to tame inflation. The Chancellor was right to reaffirm the independence of the bank but he will need all his skills to navigate the hangover that is coming.