If the government’s U-turn on the 45p tax rate wasn’t enough before Kwarteng’s conference speech it was quickly followed by another one afterward, this time on the fast-tracking of the OBR report on his mini-budget measures. The chancellor had adamantly assured Nick Robinson on the Today programme yesterday morning that it would not be appearing before 23 November. Last night it was announced we will get it before the end of October.
But, don’t worry, there are more U-turns on the way.
The humiliating volte-face has been a sobering moment for Downing Street. On Friday 23 September, Kwarteng told cheering Tory MPs:
"I have another measure, Mr Speaker. High tax rates damage Britain’s competitiveness. They reduce the incentive to work, invest and start a business. The higher the taxes, the more ways people seek to avoid them, or they work elsewhere or simply work less, rather than putting their time and effort to more creative and productive ends. Take the additional rate of income tax. At 45%, it is currently higher than the headline top rate in G7 countries such as the US and Italy, and it is even higher than in social democracies such as Norway. But I am not going to cut the additional rate of tax today; I am going to abolish it altogether. From April 2023, we will have a single higher rate of income tax of 40%. That will simplify the tax system and make Britain more competitive. It will reward enterprise and work, incentivise growth, and it will benefit the whole economy and the whole country. After all, that only returns us to the top rate that we had for 20 years, including the entire time that the Opposition were last in power, bar one month."
This has all now been abandoned.
But it only reduces the tax cuts by £2 billion leaving £43 billion still unfunded which is still causing issues in the financial markets and threatens a housing market crash as interest rates soar to unaffordable levels.
The government has bought itself time by giving the Bank of England £65 billion to spend on buying back its own bonds at the rate of £5 billion a day. This is what is keeping Sterling afloat. They have until 14 October to convince the markets, otherwise the pound will once again begin tracking south.
The next BoE move on interest rates will be sharply upwards.
To show that Britain can fund his tax cuts Kwarteng has two formidable tasks ahead of him in the next few days. First, he has to get his own MPs onside to support further swingeing spending cuts to welfare and departmental budgets. This is after 12 years of austerity and all departments struggling to stay inside existing spending envelopes this financial year because of inflation.
There is apparently already an £18 billion shortfall and The Treasury is asking for more efficiency savings next year. Tory MPs are looking at the poll numbers and are lining up to oppose any further cuts, particularly by not uprating benefits in line with inflation. This now looks impossible, so another U-turn is coming on that one very shortly.
Second, he has to convince the OBR that his so-called supply-side reforms aka slashing regulations are going to spur economic growth. Since we still don’t know what these measures are this looks a bit tricky.
The FT says Business Secretary Rees-Mogg has already submitted a list of his ideas to No 10 only to have many of them, particularly changes to employment rights, rejected by the prime minister. this is from the FT article:
"Liz Truss, the UK prime minister, has quashed a series of “half-baked” ideas put forward by business secretary Jacob Rees-Mogg to radically reform Britain’s labour market.
"Rees-Mogg wanted to slash workplace rights, including introducing a form of no-fault dismissal for higher earners and repealing the 48-hour week, according to senior government insiders.
"The proposals made to the prime minister by the business secretary are part of the government’s “dash for growth” as it tries to convince financial markets it can fund more than £40bn in tax cuts.
"But a Number 10 source said there were limits to Truss’s enthusiasm for deregulation: “Several unworkable and half-baked ideas have been suggested and have been rejected.”
"In a sign of policy tensions with Rees-Mogg, the source added: 'The prime minister wants to reduce burdens on small business but there’s not going to be a bonfire of employment regulation'.”
The chief secretary to The Treasury, Chris Philp (a man so far out of his depth he would need a SCUBA kit in a puddle) talked about the list at a Taxpayers Alliance fringe meeting in Birmingham. It includes a completely unworkable plan to excuse all businesses with fewer than 500 employees from ‘business regulation’ although nobody knows quite what this means.
Here he is saying it:
🚨 Treasury minister Chris Philp says no business with under 500 staff will be subject to business regulation pic.twitter.com/Vf4ZP12Mil
— Vote Politics UK (@votepoliticsuk) October 2, 2022
Nobody seems to think this is even a starter. It would distort competition, begin a race to the bottom on employment rights and consumer protection laws and probably have little effect on prices anyway. Companies would still sell at the market price and any savings would just increase profits.
The upshot is that if these supply-side reforms are unconvincing and the OBR threatens to publish numbers showing UK debt is on an unsustainable upward path what will Kwarteng do?
The only thing he can do is backtrack on his tax-cutting plans. In other words to tear up his own mini-budget and dash for growth and accept that Treasury orthodoxy has triumphed over him - as someone put it pithily the other day.
Martin Wolf at the FT said Kwarteng and Truss are mad, bad, and dangerous and I think he's right. They have monstrous self-belief but will soon be gone.
