As the pound declines, and investor confidence takes a hit following the Chancellor’s first fiscal statement, Samiah Anderson considers the implications for Labour.
The scale of aggressive tax-cutting measures introduced by Chancellor of Exchequer Kwasi Kwarteng to stimulate UK growth solidifies the direction of Liz Truss’s new Conservative regime. One that mirrors late-era Thatcherism: low tax, low regulation; work not welfare; free-market libertarianism; and slash red tape.
This budget breaks the conservative tradition of low borrowing and the appearance of sound fiscal responsibility and management, given that Office for Budget Responsibility has not published a distributional analysis of its policies.
Liz Truss has already asserted that she is prepared to make unpopular decisions in her pursuit of economic growth. Support from her backbenches looked non-existent, with muted responses it looks like the party is already showing signs of division so soon after a leadership election.
One of the headline announcements was the reduction in the basic rate of income tax from 20% to 19%. Almost half (45%) of gains from personal tax cuts will go to richest 5% alone, who'll be £8,560 better off. In contrast, just 12% will go to poorest half of households, who'll be average £230 better off next year. The tax-cutting solution in the current context poses a clear problem, any savings people make from tax cuts can be wiped out by increasing inflation, if not contained.
If the goal is to improve incentives, why hasn't the 40% threshold been increased? Commentators have deemed the budget staggering tone-deaf with lower and middle earners as there’s been very little in the Chancellor’s announcement to help households and the country’s poorest and improve the outlook for people deciding between eating and freezing this winter. Nothing to subside national anxiety over the cost-of-living crisis, inflation, interest rate hikes, a real drop in living standards, high levels of taxation, and concerns over energy bills. And ultimately, the promises of growth are not commensurate with the cost of living crisis. The increase in price of energy, for example, costs over 1% GDP (so a 1 pp increase won’t solve the crisis without additional redistribution).
The UK’s public finances are not on a sustainable footing, which is why we see such dire market reactions in response to the announcement. Increasing the scale of borrowing without a plan for how it will neutralise public spending is generally not something a government tends should do. With the economy still adjusting to Brexit, financial markets are clearly cognisant of the UK’s deficit.
Economists forecast that public borrowing would top £190bn this year, the third highest hike since the second world war, and remain over £110bn by 2026-27, ensuring that the public debt burden will continue to rise.
All we have to do is look to the markets for an indication of whether or not investors support this budget, and the numbers are going in the opposite direction that you might expect if investors thought they’d be a massive growth spurt in the UK. The pound continues to fall against the dollar, now down by 2% and dropping below $1.10 for first time since 1985.
Cutting corporation tax won’t be the magic bullet for increasing investment or sustainable growth in this country. Private sector investment in the UK has fallen to its lowest levels among G7 countries. This cannot be fixed overnight.
Bolstering private sector investment, productivity, and growth is an arduous task. The three are the product of all the UK’s policies in aggregate and our economic strategy.
With conference season commencing this weekend, the ball is now in Labour’s court to set out their solutions for economic prosperity for the country that is both a competent and prudent alternative ahead of the next election. Owing to the market’s reaction, this creates somewhat of an open goal for Starmer.
Samiah Anderson is a Member of the Young Fabian’s Economy and Finance Network and a Champion for Labour in Communications. She is a public affairs consultant, and a Trustee of Rethinking Economics, an international network promoting pluralism in economics. She tweets at @andSamiah.