On his first day in office as Britain’s new finance minister, Kwasi Kwarteng fired his chief adviser, the professional head of HM Treasury, someone with years of experience in crisis management.
Only three weeks later, and days after delivering a mini-budget that stunned financial markets for its ideological dogmatism and naivety, that collapsed the pound, saw government borrowing rates soar and the IMF on the attack as if the UK were a banana republic, Kwarteng and his boss Prime Minister Liz Truss are in the dock.
Their ginormous tax cuts, the biggest for fifty years, together with energy subsidies require over £400-billion of extra government borrowing to levels that many (including Paul Johnson of the Institute for Fiscal Studies) fear may be unsustainable.
In turn, extra borrowing is leading to higher UK interest rates, adding to inflation and spooking homeowners already hampered by trebling electricity and gas costs.
As if all that were not bad enough, the Bank of England moved to print money like there’s no tomorrow in order to shore up the pound — itself another inflationary spur by an institution whose main mandate is to keep inflation low.
Truss and Kwarteng insist that tax cuts will unleash new private spending, investment and innovation, causing the economy to grow faster. Their critics see higher interest rates and faster inflation choking off spending and tipping the economy towards severe recession, not quicker growth.
They see higher interest rates leading business bosses to play a waiting game, postpone investment decisions and put off hiring people.
They also doubt that the Kwarteng tax cuts will boost the economy much, since the benefits go overwhelmingly to the very well-off — the top 5% — who are likely to save their gains or spend them abroad or on imported luxuries.
Whatever reputation the Tories had for economic competence has been shredded. Confidence in the government is plunging. Britain’s economic prospects look bleak. Consumers are in panic. Tory support is sinking faster than the value of sterling on foreign exchange markets, and Keir Starmer’s Labour has soared into a massive new poll lead.
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Kwarteng will not yet say how high he is prepared to see annual government borrowing climb. Nor will he clarify when he expects UK national debt to peak, how high that peak may be, or how fast it may fall as a proportion of GDP, other than to promise to cut national debt in the medium term. All will be revealed with another budget in November, apparently.
So borrowing and debt could well soar even higher, especially as Kwarteng has promised more tax cuts in the pipeline. That is what is bothering the financial markets.
But what worries me most is the real danger that the Tories could try desperately to seek stability by making massive cuts in public spending, to bring down borrowing and debt.
Prior to the latest market shenanigans, the Resolution Foundation think tank warned that meeting Kwarteng’s wish to see debt falling in the medium term would require public spending cuts of £35-billion in 2026-27, assuming tax increases are ruled out.
We have been here before. This story only starts with an initial package of spending cuts. It continues with a stream of further cuts and ends in disaster. Two experiences should be a warning.
First, Kwarteng’s package of tax cuts is the biggest and clearest so-called ‘dash for growth’ since the March 1972 Tory budget of Tony Barber, widely acknowledged as the worst British budget since the second world war. It was quickly followed by two waves of public spending cuts in May and December 1973.
Second, in June 2010 new Tory Chancellor George Osborne fired his first salvo of spending cuts in what became a decade of austerity aimed at “shrinking the state”. He began with a £32-billion barrage of cuts but over the next ten years further spending cuts added up to £180-billion in today’s terms.
That is equivalent to annual UK government spending on health and social care, or more than double the UK education budget, or more than three times Britain’s defence bill. Or a third more than the cost in cash outlays of bailing out Britain’s banks in the 2008 financial crisis.
Kwarteng plans to borrow more to pay for permanent tax cuts for the well-off. Labour’s alternative, announced by Starmer, is to use any extra borrowing to pay for increased public investment in renewable energy, infrastructure, education and skills, to boost productivity and promote faster greener economic growth, making the public finances sustainable, not mired in this Tory pickle. DM