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Wrong budget, wrong country, wrong century

Kwasi Kwarteng's budget is cosplay Reaganomics - but the UK cannot possibly recover in the same way America did.

September 24 2022, 00.47am

Kwasi Kwarteng produced one of the largest single transfers of wealth upwards, to the richest, in this country’s history. The immediate reaction of the financial markets he hoped to appeal to has been overwhelmingly negative, spooked by government plans to add still further to its pile of debt. £45bn of tax cuts were loaded into his 'mini-Budget', skewed heftily towards the top 1% with the removal of the 45p Additional Rate of income tax. Those earning over £200,000 a year will receive a pleasant £4,333 gift from the Chancellor. Those earning less than £20,000 will be getting nothing – beyond a warning that Britain's miserly benefits system will be made yet more cruel. The bankers’ bonus cap has been scrapped (in a largely symbolic move,) and, as an extra little gift for homeowners, Stamp Duty rates were cut, encouraging further price rises in a housing market already freakishly out of line with personal incomes.

These tax cuts, the biggest in any single government announcement since 1972, are to be funded entirely by government borrowing. Like Boris Johnson before her, Truss’ Tories know how politically toxic austerity spending cuts have become. Combined with the Energy Price Guarantee, capping the costs for the typical household energy bill at £2,100 for the year, this is government set to add close to £200bn to the government’s debt pile by 2023. Once, Conservative ministers insisted on their commitment to balancing the books, justifying brutal spending cuts in the 2010s by claiming a need to shrink the government’s debt pile. Tory Prime Ministers from Thatcher onwards have used the same rhetoric as a handy stick to beat their Labour opponents with. Somewhere down the line, these deficits and rising debt piles may themselves be used as an argument for further austerity spending cuts – an outcome that may well be some part of the intention here. But for now, those supposed concerns have been parked.

Truss and her Chancellor have instead flipped the Tory commonsense on its head, ditching Thatcher-style homilies on household economics (revived during the summer’s leadership campaign by Rishi Sunak, to no avail) for an approach to government borrowing that recalls the approach of a Donald Trump or a Ronald Reagan. “The deficit,” said Reagan, who in office slashed taxes for the rich and ramped up military spending, “is big enough to look after itself.” He was right – the US government deficit, back in the 1980s as now, is monumental, but for as long as the rest of the world wants dollars, it is easy enough for the US government to finance and sustain it.

Britain, in the midst of disentangling itself from the European Union, dependent on gas imports for half of its domestic consumption, and a country that has suffered a decade or more of low wages, low investment, and low productivity, is a less attractive option. The sheer size of the fiscal about-turn Kwarteng has performed certainly appeared to spook the speculators. The pound, already on the slide against other major currencies, has taken a sharp turn southwards, whilst the government’s borrowing costs – critically dependent on its ability to sell bonds to investors – have risen sharply. We are borrowing very significant sums of money just as the costs of borrowing are rising sharply.

The gamble here is enormous. Truss’ government have taken a punt on being able to pay enough to clear the domestic energy price crisis out of the way, whilst they implement an agenda of tax cuts and deregulation. They claim this will spark growth, and they may even believe this, but the evidence is slender indeed. Corporation tax cuts in the UK for the last decade, for instance, have done nothing to address the low rates of investment by companies, and nothing at all for the low pay that is endemic to the British economy. In reality, tax cuts like this amount to a smash-and-grab raid for the rich – of using the government’s capacity to borrow to provide its preferred clients with a nice little handout. 

It's not impossible all this will work, at least in the terms the Truss government is trying to set. The next election is only two years away: with a ceiling set on gas prices by the Energy Price Guarantee, and with the government prepared to borrow huge sums for tax cuts, other things being equal both should have some (small) impact on the rate of GDP growth. If they can get through winter to spring, if inflation does not reach the 20% some forecast, if the winter is mild, if the war in Ukraine does not take turns for the worse – perhaps, then, Kwarteng will be able to point at his 'success'. 

Labour’s initial response to the announcements was strong, zeroing in on the unfairness of the tax cuts and those untouched energy company superprofits. But if the party is unable to say how it would address those fundamental economic problems, from low wages to low investment, Kwarteng will be left free to set the terms of the debate – claiming, as he does, that tax cuts will promote entrepreneurship and investment. By choosing to fight over 'growth', Labour has already conceded much ground. The dividing lines between the two parties have been made very stark, and Kwarteng has taken a major risk with his tax cuts. Labour has started to sketch out a clear alternative- of green energy and higher taxes on the rich. The polling says they are on course to turn it into reality.