The Chancellor has announced a series of massive tax cuts for high earners and corporations, which have seen the pound slump and the value of Government bonds fall. Why is the Prime Minister risking turning an economic crisis into a disaster?
“Lower taxes lead to economic growth, there’s no doubt in my mind about that", said Liz Truss ahead of her Chancellor announcing the biggest series of tax cuts for high earners in decades.
The cut to the highest rate of tax, announced by Kwasi Kwarteng this morning, will reduce the tax bill of Britain’s 600,000 highest-paid people by an average of £10,000 a year, with cuts to corporation tax and the axing of the cap on bankers’ bonuses also putting millions of pounds into the pockets of the wealthiest.
Cuts to planned corporation tax rises will also be scrapped, with big businesses offered further tax cuts inside a nationwide series of "enterprise zones". Previous plans to clamp down on tax avoidance are also being wound back.
Truss and Kwarteng are justifying this bounty for Britain’s richest by claiming that it will somehow lead to a surge in economic growth. They claim that by making the richest richer, the rest of the country will benefit.
Hardly anyone else is convinced by this. Economists have long demonstrated that the main effect of cutting taxes on high earners is that they save more of their own money, rather than re-injecting it into the economy. 'Trickle-down' economics doesn’t work when the vast majority of the money is simply gushing in the other direction.
The financial markets don’t seem convinced either. The value of the pound against the dollar slumped following the announcement. Meanwhile, the value of Government bonds has fallen the largest amount since the last economic crisis.
So does Truss’ Government really believe that any of these tax cuts will significantly stimulate growth?
The Treasury claims that these policies will allow the UK's GDP to return to 2.5% at an unspecified point in the future. However, it isn’t putting its money where its mouth is.
At every other budget since George Osborne, the Chancellor has commissioned the independent Office for Budget Responsibility (OBR) to assess what their measures will do to the UK’s growth rate. This time round, Kwarteng refused to do so and his spokespeople this morning repeatedly refused to say when, if ever, they expect the Government to meet its supposed ‘aim’ of reaching 2.5% GDP.
There are other signs that Truss and Kwarteng don’t really believe in their own spin. Giving his statement to the Commons, Kwarteng said that the package would somehow benefit ordinary working people.
Yet if he was so convinced by this, why did he not ask the Treasury to present any sort of distributional impact of his policies, as is normally done by the OBR?
The answer, as Kwarteng’s spokespeople refused to confirm to Byline Times this morning, is quite obviously because he knows that such an assessment would show a massive benefit to Britain’s wealthiest people, at the expense of its poorest.
By refusing to even make an assessment of the social impact of their plans, Truss and Chancellor are essentially revealing that they no longer care about distributing the UK's wealth to those who need it most. As Kwarteng himself told the House of Commons: “For too long in this country, we have indulged in a fight over redistribution."
The truth is that by censoring an independent assessment of his plans, Kwarteng is hiding the fact that the fight over redistribution is over and that the wealthiest side has won.
None of this should come as a surprise. Truss spent the leadership contest telling Conservative Party members that she believed in low taxes and was opposed to redistributing wealth to the least well-off. Some commentators suggested that this pitch was merely designed to win over her own party and that she would quickly pivot to a more centre-ground position once she became Prime Minister.
Today’s announcement shows that those predictions were wrong. Following three years in which Boris Johnson pledged to 'level-up' the country, Truss and her Government has now all but abandoned any pretence of seeking to more fairly share the wealth of the nation.
Indeed, while Kwarteng today announced that bankers will be free to earn more in bonuses, low earners will have their Universal Credit payments cut, if they fail to increase their hours. Meanwhile workers will see their right to strike in order to win higher wages restricted.
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One might expect that such an agenda would please Truss’ Tories, as the Conservatives have traditionally presented themselves as the party of tax cuts. Yet the response to Kwarteng’s announcements this morning on the Conservative benches was incredibly muted. Privately, many Conservative MPs – a large majority of whom did not back Truss to be leader – are terrified that she is leading the UK to economic disaster.
But by engaging on this course anyway, Truss and her party are using the UK as a laboratory for the hardline right-wing economics of her closest advisors. These include senior figures from some of the most notorious, and shadily-funded, free market pressure groups in the country.
Few independent economists believe that the Government's experiment will be successful. The Institute for Fiscal Studies has already suggested that Kwarteng’s plans will lead to an unsustainable increase in the size of the Government’s budget deficit. Treasury spokespeople this morning were unable to point to a single other country which is responding to the current crisis in this same way.
Finding a motive for implementing these extraordinary measures is not easy. Giving hand-outs to the wealthiest people in the UK at a time of major recession and price rises, when Truss' own party is well behind in the polls, seems incredibly reckless – both economically and politically.
While some commentators will seek to construct an electoral logic to all of this, the only explanation that makes any sense is that it is ideological.
In her book The Shock Doctrine: The Rise of Disaster Capitalism, Naomi Klein detailed how some governments use major crises to force through unpopular and extreme, right-wing policies, which ultimately only benefit the wealthiest and corporations.
At the time, Klein’s thesis was dismissed by many critics as overly-simplistic. Yet it is hard to think of an alternative explanation for the radical and reckless agenda Liz Truss and her Chancellor have just unleashed on the country.
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