By Andrew Hammond*
Britain’s new Chancellor Kwasi Kwarteng delivers the new government’s first major budget event on Friday, with Prime Minister Liz Truss’ team in the mood to take a risk.
In her emergency budget, Kwarteng will begin to deliver on Truss’ pledge to end what she calls a failed British consensus that has “peddled a particular kind of economic policy for 20 years that hasn’t worked.” An early signal of intent here was the government’s dismissal last week of Permanent Treasury Secretary Tom Scholar, who was seen as a purveyor of this orthodoxy, including his opposition to deficit spending.
With UK gross domestic product virtually stagnating in July and inflation hitting double digits, Truss and Kwarteng placed revitalizing growth at the heart of their economic program and pledged to “start cutting taxes from day one. While the scope of Kwarteng’s Friday announcements is unclear, Truss has previously pledged to reverse April’s National Insurance hike and scrap the planned 19% corporation tax hike to 25% next year. It will also further detail plans for a £150bn ($170bn) cap on energy prices.
Overall, more than 20 different measures are expected to be announced at the tax event. These could include a controversial plan to scrap the cap on bankers’ bonuses and end so-called nanny state measures, such as the UK sugar tax.
As audacious as Kwarteng’s plans are, there are still some big question marks. For starters, it’s unclear how the government will pay for the £30 billion in tax cuts promised by Truss. She insists they can be paid under current fiscal rules, which require debt to decline as a proportion of national income in 2024-25. However, this seems like an overstated assumption that relies, in part, on the UK economy proving more resilient than expected, perhaps helped by the ripple effects of the upcoming coronation of King Charles III.
But it is plausible that Kwarteng could simply move the goalposts in the November annual budget by extending the debt target to the next parliament. One reason it seems possible is that Kwarteng declined to release an updated official forecast for the economy and public finances alongside its mini-budget this week. The House of Commons Treasury Committee, chaired by Tory MP Mel Stride, has written to the new finance minister in recent days asking him to release figures already compiled by the Office for Budget Responsibility. However, the Treasury is reportedly keeping the forecast secret, not releasing an update until the next full budget.
Stride was rightly critical of this stance, given the deterioration in the UK economic outlook since the last March forecast. There have been significant fiscal interventions since then and, with more expectations in Kwarteng’s statement on Friday, the case for an independent forecast is overwhelming.
Contrary to the expectations of many economists, Truss argues that tax cuts can help curb inflation and that “what is not affordable is raising taxes, stifling growth and end up in a much worse position”. This is hotly disputed and former Chancellor Rishi Sunak, who had a high-flying financial career before entering politics, has called his plan “heartwarming fairy tales”.
However, as important as this tax debate is, it has obscured even bigger issues for the UK, such as boosting economic productivity, which is a huge long-term challenge. It’s far from clear whether Kwarteng will address that on Friday. The Confederation of British Industry’s trade body has warned it has not focused enough on the importance of higher productivity as the most sustainable way to deliver a higher standard of living , meet the budgetary challenges of an aging population, decarbonize, reduce the tax burden and drive growth.
The Truss team has also been less clear about its intentions for public spending. This includes the future of the so-called leveling scheme, which focuses on investment in parts of central and northern England which are economically lagging behind the wealthier south.
It worries many Tory MPs that the mini-budget will not be enough to support those on low incomes, especially if the bonus cap for top-paid bankers is lifted. The specific concern is that lifting the cap on bonuses will send the wrong message to voters, especially those in the cherished ‘red wall’ seats, which the ruling party won in 2019 and must retain in the upcoming elections. .
So Kwarteng’s budget represents a big gamble as the country faces its worst economic landscape in years. As he rolls the political dice on Friday, it remains highly uncertain whether the mini-budget will generate growth or, in turn, transform the government’s political outlook as the Tories seek to win a fifth consecutive term in the upcoming election. general.
- Andrew Hammond is a partner at LSE IDEAS at the London School of Economics.