The Budget that wasn’t – and what it tells us about the Truss Government
As a consequence, the fiscal statement contains tax cuts worth £45bn a year and the promise of deregulatory measures to accelerate the construction of new infrastructure and housing, increase investment in innovative businesses and productive assets and scrap the cap on bankers’ bonuses.
Critics might say that the most striking element of the statement is that the Government is dropping any attempt to ensure that measures are redistributive. In the opinion of Liz Truss and Kwasi Kwarteng, such concerns stand in the way of making the UK more competitive in attracting mobile investment and talent to the UK. Hence, we see the reversal of the proposed increase in corporation tax from 19% to 25% and the abolition of the additional rate of income tax, leaving a top rate of 40%.
In the course of the leadership campaign, Truss made it clear that there would be "no new taxes" and she is sticking to that. Indeed, it is hard to imagine her reversing course and increasing taxes this side of a General Election. Inheritance tax, capital gains tax (including carried interest) and property taxes – none of these look likely to see increases in the near future. Nor does it look likely that the Government will seek to tax non-doms more.
The approach comes with two big potential risks. The first is economic in terms of the market reaction. The cornerstone of Conservative economic thinking since Margaret Thatcher has been the belief that the public finances should be sustainable and that tax cuts should be funded. Truss and Kwarteng take a different view, believing that their policies will bring higher economic growth. The markets responded sceptically with gilt yields rising and the pound, at one point, falling to its record low against the dollar. Market sentiment is not helped by the fact that, despite the statement involving the biggest reduction in taxes since Anthony Barber’s "dash for growth" Budget of 1972, the measures have not been scrutinised by the Office for Budget Responsibility (OBR). The OBR was only formed in 2010 but has subsequently played an important role in costing measures and forecasting economic performance. The OBR is set to publish its forecasts later in the year but the apparent absence of transparency has attracted criticism, including from Conservative MPs.
There will be nervousness in the Treasury that a weakened pound will result in higher inflation which will put pressure on the Bank of England to increase interest rates further than would otherwise have been the case. In any event, gilt yields have already risen and the Government – now set to borrow very substantial sums for the foreseeable future – will have to pay higher levels of interest on their debt, thus creating further pressures on the public finances.
The second big risk is political. The winners from these measures are likely to be those with the highest incomes. At a time of substantial cost of living for many, this may not sit well with many voters. It is also the case that the Conservative majority at the 2019 General Election was dependent upon the support of lower income voters in post-industrial towns in the midlands and north of England. It is by no means certain that these voters will be supportive of the cuts in the additional rate or in corporation tax.
The consequence of this is that, although tax rises for high-net-worth individuals and families or corporations look unlikely for the rest of this Parliament, the politics of taxation may become more important. Labour may see that there are political wins to be achieved here and have already announced that they would restore the additional rate of income tax. Some may also conclude that the chances of a Labour-led Government after the next General Election have increased.
There is no doubt that this fiscal event involves a big gamble. There will be a debate about whether it is wise but there is no doubt that it is a significant change of approach.