Britain’s chancellor offers up a reckless budget, fiscally and politically – Economist – 23.09.22
Kwasi Kwarteng faces opposition from the markets, the Bank of England and even his own MPs.
In a “Fiscal statement” on September 23rd Kwasi Kwarteng, Britain’s new chancellor, promised a “new approach for a new era”. He was as good as his word. In a breezy speech lasting a little under 30 minutes, Mr Kwarteng launched the biggest fiscal intervention by any chancellor in half a century, eviscerated his party’s record in government and sent sterling plunging while gilt yields spiked. He did so in service of an economic goal he is unlikely to reach while diminishing his party’s chances of winning the next election. A new approach indeed.
A plan to spend £60bn ($65bn, and falling) in the six months from October to reduce energy bills for households and businesses was momentous. But then came the permanent measures. The basic rate of income tax will be cut to 19% from 20%. A planned corporation-tax rise to 25% will not go ahead, Mr Kwarteng told MPs. Instead, businesses will continue to pay a rate of 19%, the lowest in the G20.
The highest earners enjoyed an even better deal. Taxes on those who earn over £150,000 will be reduced to 40% from 45%. No longer will Britain have higher marginal tax rates than Norway, declared Mr Kwarteng. As a result of these changes the government expects to have to raise another £70bn (3.2% of GDP) in debt over the remainder of the financial year, with more borrowing to come.
All this will be done in the name of growth, explained Mr Kwarteng. He and Liz Truss, the new prime minister, hold high taxes on both labour and capital largely to blame for Britain’s low growth. Slashing them will help the country return to a trend growth rate of 2.5% a year over the medium term, Mr Kwarteng promised; so too will a host of promised supply-side measures, such as pledges to reform planning rules and create low-tax investment zones. “We will focus on growth, even where that means taking difficult decisions,” said the chancellor.
Those decisions put the Conservative government at war with its own recent past. A cut to national insurance, a payroll tax, comes barely a year after it was introduced by Boris Johnson, the former prime minister, and Rishi Sunak, the ex-chancellor. The increase to corporation tax had not even come into force by the time Mr Kwarteng pledged to nix it. Proposed increases on alcohol duty introduced by Mr Sunak will be scrapped. Reforms to self-employed status introduced under Theresa May (who left office in 2019) and Boris Johnson (who left in September this year) will be repealed.
It also marks a philosophical break. For the past decade the Conservatives have based their appeal on a reputation for sound finances. Now, under Mr Kwarteng, debts will pile up. Tax cuts would increase Britain’s public-debt-to-GDP ratio from a little over 80% in 2021-22 to nearly 95% in 2026-7, say the Institute of Fiscal Studies (IFS), a think-tank and Citi, a bank. Even Mr Johnson, a spendthrift prime minister, accepted that increased spending had to be funded by extra taxes. Now the Conservatives, or at least the party’s front bench, are relaxed about unbalanced books.
At an annual cost of over 1.5% of GDP, the tax cuts alone are worth the most of any budget since 1972, according to the IFS. The comparison is uncomfortable, since that year’s budget—also premised on unleashing economic growth—started Britain on a path to crisis that culminated in an IMF bail-out in 1976. On the day of Mr Kwarteng’s statement, sterling fell by 3% against the dollar, its largest one-day drop since the start of the pandemic. For the first time since 1985, a pound is worth less than $1.10.
Mr Kwarteng’s policy is the inverse of the David Cameron years, when the party bet on tight spending while money was cheap. The Bank of England has already raised interest rates sharply in an attempt to contain inflation, which has reached 9.9% thanks largely to rocketing energy prices. Now it must offset the economic sugar rush of a bigger deficit. At the start of August, market prices suggested rates would peak at around 2.8% in 2023. By the time Mr Kwarteng started to deliver his statement, at 9.30am, the figure was about 5%. By lunchtime, it had risen to nearly 5.5%.
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