Desperate throw of the dice

With the pound falling and yields on government gilts rising, markets are delivering their verdict on Kwasi Kwarteng’s ‘growth plan’, writes Eddie Ford

Far from being a ‘mini-budget’, Kwasi Kwarteng’s statement to parliament on Friday was a major fiscal event - an unwanted one, judging by the reaction, domestically and internationally. Firstly, for a party that is meant to be conservative, it was a clear rejection of the approach to the economy taken by David Cameron, Theresa May and Boris Johnson. A “new era”, in the words of Kwarteng: away with the old treasury orthodoxy - long live the revolution!

So what we got from the chancellor, Robin Hood in reverse, was £45 billion of unfunded tax cuts, which will really only benefit the upper middle classes and the capitalist class itself. Roughly speaking, taking account of the income tax and national savings changes, someone earning £20,000 will be £18 a month better off, those with a salary of £50,000 will be £61 better off, and if you are in receipt of £100,000 you will have £92 more a month. But, once you go the higher tax bands, then you are definitely in the money (well, more money). Thanks to the fact that Kwarteng has scrapped the top tax band, someone who qualifies as being an additional-rate taxpayer at £151,000 or more a year will have a monthly saving of £123, due to their new lower marginal tax rate of 40% - good news for the 629,000 people in this group. And someone ‘earning’ £1 million will gain £55,220 a year - to those that have shall be given. But most workers will not notice the difference in their pay packet.

As part of his supposed “plan for growth”, Kwarteng abolished the cap on bankers’ bonuses - obviously the poor things have not got enough money - reversed the rise in national insurance contributions and brought forward by a year the reduction in the basic rate of income tax from 20% to 19% (already pencilled in by his predecessor, Rishi Sunak, for 2024). The chancellor also announced a doubling of the £125,000 threshold for stamp duty on home purchases and ditched the planned increase in corporation tax from 19% to 25% that was due to come into force in April. An estimated £60 billion will be spent capping energy bills for households and businesses during the coming winter, then some more. According to the Resolution Foundation, the measures - including the energy support packages - will involve an extra £411 billion of borrowing over five years. Furthermore, Kwarteng is promising further tax cuts for the rich. This means that the government will be borrowing an eye-watering sum of money, especially when you bear in mind that a year ago you could have said that borrowing was cheap, but what is happening throughout the world - not least in Britain - is that interest rates are going up and are expected to keep going up.

Though it has been strenuously denied, naturally, the ‘mini-budget’ was a crude version of the ‘trickledown’ theory (or ‘Trussonomics’, as it is now known). As we all know, the myth goes that the wealth-creators in society are the rich and the entrepreneurs, who will invest more in production with all their extra money - meaning they hire more workers. So the extra wealth trickles down and permeates society! Well, it has been tried before and today most bourgeois economists admit that it does not work - all it does is make the rich richer and the poor poorer. A pretty straightforward set-up.

The Truss-Kwarteng strategy is therefore hugely risky - the gamble of a lifetime - and virtually nobody thinks it will work. Indeed, it is impossible to see how the biggest tax cuts since 1972 can be anything other than inflationary - at a time when inflation is already high by recent British standards, at 10%. In the parliamentary Conservative Party itself there is a great deal of scepticism, if not despair. Rishi Sunak described it as “fairytale economics”, following on from Michael Gove’s previous comment that Liz Truss was taking a “holiday from reality” with her plans to cut taxes during the cost-of-living crisis. An unnamed Tory MP told the press that “this madness must end”, therefore the Tories need a spell in opposition - which they might well get. At least one Tory MP is believed to have already submitted a letter expressing no confidence in Truss to the party’s 1922 Committee, with talk among backbenchers of trying to oust her if she does not change economic course. Mere talk at the moment, but it could become a reality.

True, the fall in the pound needs to be put in context. With events such as the Ukraine war, what tends to happen is that money throughout the world pours into the US and the dollar, which is seen as a safe haven. After all, America has got the aircraft carriers, ICBMs, enormous military, etc. In other words, it is both the world’s biggest economy and the hegemonic power: it is not going away any time soon. Partly then, the fall of the pound is the result of the rise of the dollar. But the pound is still falling in absolute and relative terms. Not all that long ago a pound was worth $1.50, but look at it now - testimony to the decline of Britain over the last 40 to 50 years. There is now widespread speculation about a currency crisis, if not an actual run on the pound, which could have all sorts of consequences - all of them disastrous.

Alarmingly for the Tories (or at least it should be), the International Monetary Fund launched a stinging attack on the chancellor’s tax-cutting plans and called upon the UK government to “reconsider” them in order to prevent stoking inequality and deep social discontent. Pointing out the obvious, the IMF also stated that Kwarteng’s ‘mini-budget’ risked undermining the efforts of the Bank of England to tackle rampant inflation amid the cost-of-living emergency. The government is putting its foot on the pedal, whilst the Bank is hitting the brakes. A crazy situation - the vehicle will just skid off the road. Following the IMF’s judgment, the pound fell against the dollar to $1.0549, representing an overall 1.7% drop, despite - or maybe because of - the BoE’s intervention.

Sadly for Liz Truss, she will not be getting any honeymoon period. In the first three weeks of her premiership, the Labour Party lead over the Tories had grown considerably, surging to 17% according to YouGov - the largest in 20 years. The Conservatives are now on 28% and Labour on 45%. More than enough to secure a Labour majority in the House of Commons. And it is worth recalling those silly people on the left who have been insisting that Sir Keir is ‘useless’, doesn’t want to fight the Tories, doesn’t want to be prime minister … he only want’s to purge the left.

Now, the odds are that Liz Truss will wait to the very last moment to call a general election. She might even end up being one of Britain’s shortest-serving prime ministers, the current record being George Canning at 119 days in 1827. But, if she goes, it is unlikely that Tory MPs will allow another leadership contest. That would risk the return of Boris Johnson. So the chances are on one candidate and a coronation.