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ANDREW NEIL: Truss is taking a gamble. But sticking with failed policies would be an even bigger one

Daily Mail logo Daily Mail 23/09/2022 Andrew Neil For The Daily Mail

After 12 years of Tory government we finally get a Tory budget. Yesterday's not-so-mini-budget was a watershed event, taking the country in a new economic direction and creating clear blue water between government and opposition.

The Tory faithful couldn't quite believe it. Labour struggled to grapple with its implications. The political dividing lines will now be starker and fiercer than they've been for a generation.

No more tax rises by stealth (or, more recently, in plain sight). Or endless, futile tinkering with the minutiae of spending and taxation to give voters a false impression of constructive activity. Or the relentless doling out of taxpayers' dosh to whatever fashionable vested interests managed to catch ministers' attention.

Instead, Prime Minister Liz Truss and her Chancellor, Kwasi Kwarteng, junked all of that in favour of one overriding economic priority: higher economic growth. Many of the verities of Britain's economic establishment have been slaughtered in the process.

The Treasury, the Institute for Fiscal Studies (IFS), the Resolution Foundation and other like-minded social democratic organisations have long obsessed about the equity and income distribution consequences of any tax changes.

Such is their clout with the media, especially the BBC, that they have long inhibited Tory Chancellors from doing Tory things.

No longer. Truss and Kwarteng don't care if abolishing the 45 per cent top rate of income tax means big earners pay less tax. If it contributes to more economic growth by encouraging high-fliers to be based in the UK, then so be it.

They're not bothered if lifting the cap on bankers' bonuses means bigger payouts for unloved bankers. If it reinforces Britain as the world leader in global financial services, then it's worth doing.

Scrapping next April's planned rise in corporation tax (on businesses' profits) won't win any popularity contests outside company boardrooms. But an essential part of Britain's post-Brexit future is surely to be a magnet for foreign investment. Whacking up the country's key business tax was a strange way of going about it.

 Prime Minister Liz Truss and her Chancellor, Kwasi Kwarteng, junked all of that in favour of one overriding economic priority: higher economic growth © Provided by Daily Mail  Prime Minister Liz Truss and her Chancellor, Kwasi Kwarteng, junked all of that in favour of one overriding economic priority: higher economic growth

Of course, reversing the recent rise in National Insurance will benefit most those who pay most. But it's worth a couple of hundred to those on modest incomes. And, anyway, aren't those bleating the loudest the same folks who opposed the rise in the first place?

As yesterday's early morning financial statement sunk in, it slowly dawned on Labour just how radical a departure it was from current orthodoxy. Soon the air was thick with howls of anguish about tax cuts for the rich, bloated bonuses for bankers and thin gruel for the poor.

These are effective attack lines. We will hear more in the weeks ahead, starting at the Labour conference in Liverpool this weekend, and Truss and her senior ministers will need to show more political acumen than has so far been obvious in dealing with them.

New ways require new justifications. The Treasury estimates that abolishing the 45 per cent top rate of income tax will cost £2 billion a year.

This is a typically static official calculation. If it results in more top earners declaring their income in Britain, then it could soon more than pay for itself.

Ditto bankers' bonuses. The cap is a relic of EU regulation. Banks simply increased pay to compensate for reduced bonuses, thereby making their compensation costs more fixed and less flexible.

Frankfurt, Paris and Amsterdam have tried hard to lure our financial services away from the City since Brexit, with only limited success. Bonuses in those centres are still capped. London now has the advantage.

And, remember, with the new top rate of tax at an internationally competitive 40 per cent, every £1 million banker's bonus is £400,000 more for schools and hospitals.

Prime Minister Liz Truss and her Chancellor, Kwasi Kwarteng, junked all of that in favour of one overriding economic priority: higher economic growth  © Provided by Daily Mail Prime Minister Liz Truss and her Chancellor, Kwasi Kwarteng, junked all of that in favour of one overriding economic priority: higher economic growth 

Fiscal conservatives worry that the tax cuts and the new energy price cap are being financed by extra borrowing, which is unconservative. It is a legitimate concern, especially after the massive government debt racked up to deal with the pandemic.

The worries are compounded by the lack of any borrowing and debt estimates from the Office for Budget Responsibility (OBR) to accompany yesterday's mini-budget. This has made the currency and debt markets even more nervous when it comes to Britain.

But for more than a decade now I've watched chancellors take tough, painful decisions on tax and spending based on OBR borrowing forecasts that turned out to be huge over-estimates, so much so that in retrospect neither the tax rises nor spending cuts were necessary.

Indeed, as Truss attempts to take the country in a new, less orthodox direction, I'd argue that it's a blessing that she's been able to do so unencumbered by the OBR's dubious forecasting.

We'll get the OBR's latest workings in two months anyway, when it might have a better idea of what 2023 will look like. Nor are we entirely in the dark. The Treasury says the tax cuts and energy price cap measures will increase borrowing this year from £162 billion to £234 billion — an extra £72 billion.

The IFS thinks we'll still be borrowing £100 billion a year through the middle years of the decade.

These figures have spooked the markets. The pound continued its decline against the dollar after Kwarteng's statement and the yield (or interest rate) on short-term government debt rose to close to 4 per cent, making it a lot more expensive to borrow than only two years ago, when it was 0.4 per cent.

These are real constraints on the Government's ability to borrow even more. A falling pound merely fuels inflation, especially when it comes to imported energy, which is priced in dollars © Provided by Daily Mail These are real constraints on the Government's ability to borrow even more. A falling pound merely fuels inflation, especially when it comes to imported energy, which is priced in dollars

These are real constraints on the Government's ability to borrow even more. A falling pound merely fuels inflation, especially when it comes to imported energy, which is priced in dollars.

Interest rates are already rising. If excessive government borrowing forces them even higher, that will merely choke off the economic growth the Government so desperately seeks.

There's another factor at work here. The global currency and debt markets have had a 'down' on Britain for some time. It's not clear why. Britain's debt-to-GDP ratio is among the lowest in the G7 club of big economies. Our budget deficit is on a par with many other major economies. Economic growth is anaemic — as it is everywhere, from the Eurozone to America to China.

I suspect it's a Brexit hangover. The publications global market players read most closely include the New York Times, the Economist, the Financial Times and leading European papers such as Le Monde and the Frankfurter Allgemeine Zeitung. All — and others like them — have been relentlessly negative about Britain since the 2016 referendum.

The latest edition of the Economist, in a typical sideswipe, opined that Truss's economic policy 'will not work', indeed it was 'doomed' — even though the magazine had gone to press before the Chancellor's statement.

This air of constant gloom has permeated global financial markets. Plenty of influential Remainers have been only too happy to encourage this negativity, if only to justify their anti-Brexit stance. But it does represent a serious constraint — a discipline even — on the Government's ability to borrow more than it already plans.

The Government could have given itself some more wiggle room with the markets if it had gone further with a windfall tax on energy companies. The multi-billion-pound rise in their profits has nothing to do with their business expertise. It is an unalloyed windfall. You don't have to be a socialist to see the case for a one-off tax to help folks with their bills.

I would also have considered a one-off solidarity tax on the well-off. They've prospered as never before in a decade of cheap money, which has pushed their assets to record valuations. A one-off solidarity contribution — then the abolition of the 45p rate. That would have been fair.

Truss and Kwarteng don't care if abolishing the 45 per cent top rate of income tax means big earners pay less tax. If it contributes to more economic growth by encouraging high-fliers to be based in the UK, then so be it © Provided by Daily Mail Truss and Kwarteng don't care if abolishing the 45 per cent top rate of income tax means big earners pay less tax. If it contributes to more economic growth by encouraging high-fliers to be based in the UK, then so be it

Instead Truss-Kwarteng chose to bring forward a 1p cut in the basic rate of income tax, which is basically Tory virtue-signalling with no economic consequence, bar the cost (£5.3 billion next year since you ask).

And the cut in stamp duty will be nice for those who benefit but in the continued absence of planning changes to increase housing supply will merely jack up house prices further (until the Bank of England's interest rate rises take their toll on mortgages).

Not tampering with stamp duty or the basic rate of income tax would have given the Government a stronger borrowing position. It would have been stronger yet with windfall and solidarity taxes. An ideological approach like Truss's brings simplicity and clarity. But it can also blind you to sensible steps forward.

Anyway, there's a chance the markets will soon be pleasantly surprised by how little extra borrowing the Truss-Kwarteng package entails. The IFS guestimates that capping the average household fuel bill at £2,500 will cost £150 billion over two years assumes gas prices remain at their current extortionate levels. That assumption is already looking threadbare.

Gas prices are falling as high prices choke off demand and users turn to other forms of energy, such as coal. Wholesale gas prices are already down by a third on their summer peak, way below the IFS assumption, and are likely to fall further.

European gas storage tanks are full so the scramble to fill up, which pushed up summer demand, is over. Energy conservation, whether by rationing (Germany) or blackouts (Pakistan, China) is reducing demand. The high cost of gas has encouraged China to generate more electricity by coal. It's even turning back expensive shipments of liquefied natural gas, which Europe will readily welcome.

Demand is being further curtailed by part-time working at heavy industries and the global economy slowing to a walk. These are not good developments in themselves. But they mean the price of gas is set to fall further in 2023 as demand destruction sets in.

The Chancellor estimated his energy price cap would cost £60 billion between now and April. It could be less, though it will take time for lower gas prices to work their way through.

But if gas prices really start to return to balance from early spring onwards, then the cost for the 12 months after that could be only £30 billion — or less — making government borrowing much more manageable.

The Chancellor estimated his energy price cap would cost £60 billion between now and April. It could be less, though it will take time for lower gas prices to work their way through. Pictured: Truss and Kwarteng chat during a visit to Northfleet after unveiling the new measures © Provided by Daily Mail The Chancellor estimated his energy price cap would cost £60 billion between now and April. It could be less, though it will take time for lower gas prices to work their way through. Pictured: Truss and Kwarteng chat during a visit to Northfleet after unveiling the new measures

Nor is the Treasury necessarily right when it says that tax cuts announced yesterday will cost £45 billion a year. Again, this is a static calculation which makes no allowance for the dynamic effects of tax cuts.

I've already explained how the cut in the 45 per cent top income tax rate could be self-financing. Allowing foreign tourists to shop VAT-free could bring in a lot more visitors and, with them, a lot more taxable spending power. Previous cuts in corporation tax did not stop overall revenues from growing. It all depends on achieving the economic growth that Truss has made her central goal. 

The Bank of England thinks the economy is already in recession and, for once, it's probably right. America is also in recession, albeit a mild one so far. Deutsche Bank thinks the Eurozone GDP will decline 3 per cent over the winter (not so mild) and Germany GDP 3.4 per cent next year (not mild at all).

These global headwinds make it impossible for Britain to buck the trend. We will be dragged down into very low growth — or no growth at all — this winter. We will not be alone.

But if gas prices start to return to a semblance of normality before winter is out, if borrowing ends up lower than the gloomsters predict (helping keep interest rates low) and if the various tax cuts start to work their supply-side magic then growth could return quickly to the British economy — perhaps even ahead of most major economies.

The short-term economic significance of the tax cuts and the energy price cap is that, together, they will act like a multi-billion-pound boost to the economy at a time when monetary policy is tightening to squeeze inflation out and the global economy is stuttering.

In times gone by we'd have called it Keynesian pump-priming, though best not to mention that to free-marketeers like Truss or Kwarteng. It will make any downturn shallower and shorter than it would otherwise have been — and offers the prospect of a strong recovery sometime in the first half of next year.

Truss must certainly hope so. It is said she's taking a great gamble. That's true. But sticking with the failed policies of the recent past was probably an even a bigger gamble. The stakes are certainly high.

If by this time next year the economy is still in the doldrums, then it's not just Truss who will be finished. So will any prospect of the Tories winning the next election.

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