Kwasi Kwarteng and Liz Truss are a Chancellor and a Prime Minister in a hurry, they know they have only got 18 months to get the economy growing if they are to win-re-election. So, they went all out in today’s non-budget Budget. Not only did they cancel the corporation tax rise and reverse the National Insurance increase but they abolished the higher rate of tax and brought forward the cut in the basic rate of income tax. This is all against the backdrop of an energy price guarantee that the Chancellor said would cost £60 billion over the next six months. This and the tens of billions of tax cuts will be paid for by borrowing; the government will borrow £72.4 billion more than it expected to in April.
Kwarteng’s argument is that what the economy needs is growth, so he is going all out for it. But there is a risk in cutting taxes while government spending continues to increase. It is a bet that the markets will be prepared to continue funding that at today’s relatively low rates and that these measures will succeed in breaking the low-growth cycle the UK has been in since the financial crisis. This approach will either succeed or it will not – there is no middle ground with this combination of policies.
Politically, there are obviously risks in this. The first act of this government that will get the public’s full attention — the energy price guarantee was, obviously, overshadowed by events — includes a tax cut that means those on over £150,000 a year pay the same marginal rate as those on £51,000 a year and the removal of the cap on bankers bonuses.