With this set of fiscal reforms the government had a chance to offer people some respite. Instead, the only thing they have made certain of is that the rich will get richer at the cost of everyone else.
I won’t pretend that I was hopeful when Kwasi Kwarteng stood up to present his so-called ‘mini-budget’ to Parliament on Friday. I didn’t have any expectations of him delivering a package of measures beyond the inadequate policies that he had teased. What I didn’t foresee though, were the perilous moves and gambles he made to save the richest in our country tens of thousands of pounds and leave everyone else picking up the pieces of a wrecked economy.
The picture was already bleak. The Bank of England has cautioned that the country may already be in a recession. High inflation is piling pressure on peoples’ purses and we are trapped in an energy price crisis with limited short-term relief that leaves millions of people every day forced to choose between ‘heating and eating’. These pressures are only set to get worse going into next year as the situation worsens and support runs out. Kwarteng’s mini-budget will ensure that the people currently under the most pressure continue to foot the bill.
Let’s take a look at the headline announcements, policy by policy. Firstly, those much talked-up tax cuts. Kwarteng has reduced the basic rate of income tax from 20% to 19%) and confirmed the scrapping of the national insurance rise that was set to arrive in November. Although this offers absolutely nothing to students, pensioners, and non-earners, it is true that the average household could save up to around £1000 per year. While that looks appealing, it is nothing compared to the comparative pay-rise that the country’s top earners will now receive. The 45% tax rate and dividend tax, which affect the highest earners, have both been scrapped. So has the much-debated cap on bankers’ bonuses. The Conservatives’ supporters in the City must be struggling to believe their luck!
As a result of these changes alone, someone earning £250,000 will be £8,344.88 better off each year. That is in stark contrast to a graduate earning £28,000. They will save just £347.18. Combined with their student loan repayments, they’ll take home just 60p for every £1 they earn above the marginal tax rate.
Up next is stamp duty – the tax normally levied by the government on when purchasing a property, depending on its value. This is a policy that the government has dressed up as being targeted at young first-time buyers. In reality, the government has chosen a reckless path that risks driving housing prices even higher than they were during the days of the COVID-19 pandemic. Meanwhile, The Bank of England pulled in the other direction, raising interest rates and therefore provoking a mortgage repayment rise for millions. This selection of policies will do nothing to help the vast majority of graduates for whom affordable mortgages are a distant dream and instead further escalate a crisis in the housing market to dangerous levels.
And then the corporation tax cuts – a sorry attempt to reduce the economic impacts of Brexit that the Conservatives continue to hide from and deny. Immediately after the announcement on the BBC’s Politics Live programme, the Chief Secretary to the Treasury Chris Phillip pointed to Ireland and Google as a case study for just how effective this move would be. “They aren’t [in Ireland] because they like Guinness,” he joked to a remarkably unamused room. This neglects the fact that the Irish government and the EU have been trapped in legal proceedings to exert any meaningful tax payments at all from that company for the last five years. The reality is that the biggest companies have already left and the UK will struggle to return without more relaxed immigration laws to increase the availability of skilled workers, or any workers for that matter. In the lead-up to Friday, The Institute for Public Policy Research (IPPR) warned a “race to the bottom” of similar measures had failed to boost investment and economic growth in Britain over the past 15 years. There’s absolutely nothing so far to suggest that this will be any different and if not worse.
Fear not, though! The Chancellor was also bold enough to announce up to 40 new ‘investment zones’ that he promises will “unleash the power of the private sector”. Ignore the fact that this policy has been tried countless times in the past all over the world and been proven to fail. Instead, past attempts have seen companies and their jobs moving from one area of the country to another and failing to attract anyone new from overseas. Kwarteng hasn’t been able to offer any suggestions of why his plans will be any different.
With this budget,the government had an opportunity. They could have offered some relief to normal families, students, and median earners. But no. Not only was there no improvement to the temporary measures to protect against the energy crisis but further investment in our collapsing public services was left completely off the table. Infrastructure changes have also very much taken a ‘back to the future’ approach by neglecting the long-term potential of cheap green energy to remove subsidies on North Sea Oil and the moratorium on fracking. A truly meaningful windfall tax on energy companies and sensible fiscal reforms could have gone a long way to funding these changes. But instead,Truss and Kwarteng have bet on it in order to deliver a budget that focuses on ideology and ignores real-life problems.
The outcome of all of this has already been a picture of economic disaster. Sterling lost 4% of its value in just 24 hours and is now at a 37-year low. This is not only catastrophic for importers but will drive up inflation even further.
Meanwhile, analysis by Bloomberg has forecast that interest rates could rise to 5.3% by August 2023. This is a problem because not only does it make borrowing more expensive for everyone, reducing spending, but also makes government borrowing dearer. This comes just as the Treasury is looking to lean on borrowing to fund their tax cuts and investment. The director of the IFS has summed up the situation by saying: “The plan seems to be to borrow large sums at increasingly expensive rates, put government debt on an unsustainable rising path, and hope that we get better growth.”
Bankers and high earners won’t be too concerned by a crashing economy as they revel in their now duty-free champagne, toasting the new money that they can now spend on holidays abroad in foreign markets. In the meantime, the worst-off will have to continue to choose whether to ‘heat or eat’ as winter approaches. Pensioners are comparatively the worst-off, and young graduates have again been neglected altogether. Levelling-up has come to an end before it even began and has been replaced by trickle-down economics. Again, the young – and especially students – have been left to foot the bill.
Image: CC2:0//Policy Exchange via Flickr.