Liz Truss and Kwasi Kwarteng are facing an early test of nerve after their radical tax-cutting policies prompted huge market uncertainty, a crash in sterling and the prospect of further interest rate hikes to deal with spiralling inflation.
Having effectively gone all in in pursuit of GDP growth as the panacea for all the UK’s economic woes, and by insisting they will not comment on market movements and let the turbulence play out by itself, the prime minister and chancellor “are limited in what they can do to contain the fallout”, said the i news political editor Hugo Gye.
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Among them are the reversal of the National Insurance rise, scrapping the planned rise in corporation tax, a cut in the basic rate of income tax brought forward to next April and, most eye-catching and controversial, abolishing the 45p top rate of tax.
Yet concern over increased government borrowing to pay for tax cuts and the energy support packages, at a time when state debt is becoming more expensive all around the world, has spooked investors.
“The fact the Chancellor refused an offer from the Office for Budget Responsibility to publish an economic assessment gave the impression that Kwasi Kwarteng was hiding from reality,” wrote former shadow chancellor John McDonnell in The New Statesman. “It simply reinforced the belief that the mini-budget was a massive gamble based more on ideology than economic science.”
‘Tax cuts are just a quick-fix sugar-high’
“Kwarteng is right to focus on the labour market if he wants to boost growth,” said Sarah O’Connor in the Financial Times, “but last week’s policies were small solutions to problems that don’t exist, rather than big solutions to the problems that do.”
Chief among these is increasing productivity. “Tax cuts are just a quick-fix sugar-high,” said John Van Reenen, an economics professor at LSE. “They do not deal with the UK’s fundamental problem of miserable productivity growth.”
In a bid to calm markets, the Treasury is planning a series of announcements about structural “supply-side” reforms that aim to drive growth in conjunction with tax cuts.
“Common sense and reams of economic studies show that this is simply not the case,” argued Van Reenen. “Many high tax economies like Germany and the Nordic nations are robustly successful and big tax cuts for top earners have no clear relationship with growth (although they definitely increase inequality).”
The polling problem
With Politico reporting that Labour leader Keir Starmer is “gearing up to fight the next general election on the economy and is pitching Labour as the party of fiscal rules and responsibility”, the latest polls will make uneasy reading for the government.
A YouGov survey for The Times found Labour has a 17-point lead over the Tories, the largest the party has enjoyed in more than two decades.
“If your plan is unpopular with the markets but popular with voters, then that’s an OK place to be,” a Tory source told the Times, “but if you’ve spent all this money and it’s unpopular with everyone, then that is very dangerous.”
The question then becomes whether Truss and her team have the belief, and more importantly the nerve, to stick to their guns and ride out the storm in the hope growth will pick up before the next election in two years’ time. Or will the rest of the Tory party force them to U-turn before they risk permanently damaging the Tories’ economic credibility?
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