Before getting
distracted by the spin put on Friday’s budget, it is important to
be clear what the motivation for it is. It’s not a budget for
growth, it’s a budget for the rich and those who fund the
Conservative party. Abolishing the 45% tax band obviously benefits
only the very well off, dropping the increase in corporation tax will
mainly benefit shareholders who are mostly at the top of the income
distribution, not extending the windfall tax on energy producers will
exclusively benefit shareholders, not increasing NI rates benefit the
better off far more than anyone else, ending the cap on bankers
bonuses benefits the already very rich, and so on. Conservative MPs
are much more right wing on economics than Conservative voters or
even party members, and this is a budget for them, as long as it
doesn’t mean they lose their jobs.
The Resolution
Foundation calculates
that almost two thirds of the tax gains go to the richest fifth of
the population, with almost half going to the top 5%. They also point
out that the stamp duty changes mainly benefit richer
households in the South East. Of course poorer households will get a
small amount of this giveaway, but less than is needed to cover the
increased costs of essentials according
to NEF. The IFS have looked at all the forthcoming tax
changes (including frozen income tax allowances), and they calculate
that your income would have to exceed £155,000 before you are
better off, and if you earn a million a year you gain £40,000
It is also a budget
that is highly likely to mean cuts in public spending after the next
election. The OBR were not allowed to publish their post-budget
forecast, for the first time in their 12 year existence, because if
they had been their budget deficit projections would have shouted
‘not sustainable’. Not sustainable is just a shorthand way of
saying that taxes will have to rise or spending will have to be cut,
unless something very beneficial for the public finances turns up.
But of course it’s equally likely that something detrimental to the
public finances will turn up. You don’t get to announce the biggest
tax cut for 50 years in a deteriorating economic
climate without severe implications for future spending.
Here
are the Resolution Foundation’s assessment of the
deficit and debt, and here
is the assessment by the IFS. Both suggest deficits in the medium
term that are unsustainable. The new Chancellor also committed
himself to reducing government debt relative to GDP in the medium
term, meaning that if these deficit projections turn out to be even
roughly right he is going to have to raise taxes or cut spending.
It cannot be
stressed often enough that cutting taxes and spending less is a very
unpopular policy to pursue, unless you are a Conservative party
member or a large part of the commentariat. This is from the latest British
Social Attitudes survey.
Just 6% of the
population want lower taxes and lower spending on health, education
and welfare, while 52% want the opposite.
So to the spin. What
the government would like you to think is that this is about fairness
vs growth. These measures are very unfair, but they say they are designed to
increase long run growth so everyone will be better off (just the
rich will be a lot better off than the poor). The spin, like the
deficit spin that these same politicians lectured us with for the
last 12 years but have now abandoned, is a load of nonsense. There is
no
relationship between tax levels and prosperity. Worse
still, as I outlined here,
the evidence clearly suggests that increasing inequality at the top
reduces growth. Either the government is blind to the
evidence, or they have to pretend it’s all about growth as a cover
for the true reason for tax breaks for the rich: their ideology and
party donors.
If this government
really wanted to increase growth it would make trade with the EU
easier, but right now it is doing the opposite. It would be focusing
only on encouraging the energy of the future, green energy, which is now much cheaper than gas, Instead they are encouraging fracking (and saying you shouldn’t worry
about small earthquakes) and more investment
in getting oil out of the North Sea. If this government really wanted
to increase growth, it would be helping the NHS reduce the number of
people not working because they are sick by training more nurses and
doctors and paying them more. Instead tax cuts now mean that in the
future the NHS, with its record waiting lists, will be even worse
than it is now, if it has a future at all.
If you (erroneously)
think the markets know more about growth than researchers who examine
the evidence at the IMF, then they too think the government is doing
nothing for growth. If the markets believed this budget would
increase long run growth, sterling would appreciate. Instead the
uncertainty created by an unfunded tax giveaway for the better off
has led to the cost of government borrowing rising
substantially both just before and following the
budget, and sterling has fallen against the Euro. (The latter is
particularly significant, as you would normally
expect an unfunded tax giveaway to appreciate sterling
because of expectations of higher interest rates.)
Some of the criticism of this budget is also missing the point. It’s very unlikely we will see a repeat of
the Barber boom of the 1970s for two reasons. First and most
importantly because we now have an independent Bank of England.
Instead what this budget ensures is higher interest rates. (Can there
be much doubt that if it was Kwarteng rather than the Bank that
decided interest rates, then a short term inflationary boom would be
a bigger possibility.) But as I noted in my last post, offsetting a
short term inflationary boom with higher interest rate is not a
precise art, so there is a possibility that the government might get lucky with three or six months of 2.5% annualised growth (or more) before
the next election. The second reason we will not get anything like a
Barber boom is that most of the tax cuts are going to the better off
who save most of their extra money.
What has to be added
is what was absent from this budget giveaway. There was only the
smallest
additional help beyond the price cap for those struggling to make
ends meet, and instead more use
of sanctions for claimants, sanctions which the
government’s own research says caused more harm than good so they
refused to publish it. Alongside higher energy prices,
we have sharply higher food prices which the government is ignoring.
It is indicative of where this government’s priorities are that
their first fiscal actions have focused on giving the most money not
to those who need it most, but those who need it least.
Why was this a
uniquely awful budget, that led to higher government borrowing costs
and a falling currency. Tax cuts aimed at the wealthy at a time when
many less wealthy are finding it hard to make ends meet is pretty
bad, but it is not unique in recent times. George Osborne cut the top
rate of tax in 2012 in the middle of a sustained period of austerity,
and cut corporation tax too. Nor is justifying tax cuts aimed largely
at the rich by pretending they will boost long term growth a new
excuse. Trickle-down economics has been growing as part of
Conservative DNA since Thatcher. The growing evidence that it doesn’t
work and will probably reduce growth has little chance when set beside
growing party donations from the very rich.
What made this
budget stand out from any UK budget over the last 30 years was the
absence of any attempt to match taxes to day to day spending over the
medium term. I’m not talking about the deficit fetishism of
Osborne, Hammond and Sunak: that had long passed its sell by date.
However for the last thirty years Chancellors have attempted to put
their decisions within some kind of overall fiscal framework.
Kwarteng not only failed to do that, but he stopped the OBR making
that clear. That matters not just because it raised borrowing costs
and depreciated sterling, but because it almost certainly means, if
this government remains in power, spending cuts on the horizon. Cuts
in spending that will be far deeper than anything George Osborne did,
because UK public service provision is already at rock bottom and in
some cases close to collapse.
When the mainstream
media and non-partisan think tanks talk about this budget being a big
gamble, they are going as far as they feel they can in condemning it.
What the country and the economy needs right now is reducing the
record delays for standard NHS treatments, reducing appalling waiting
times for ambulances and A&E, allowing schools to fill the gaps
left by the pandemic rather than not
replacing teachers to pay energy bills, and so on. An
economy where the public sector no longer works is an economy that no
longer works. What this budget showed is a Chancellor who not only
doesn’t understand this, but intends to make it worse.
