The 23 September ‘mini-budget’ betrayed a level of desperation by the Truss-led Tory government which has set off alarm bells among wide sections of the ruling class. Its notion of ‘trickle-down’ economics has been completely discredited by decades of experience, and when Truss advanced it during the Tory leadership election campaign she could find only one economist who supported the theory. On the day that Chancellor Kwasi Kwarteng presented his statement the IPPR think-tank had to point out that Britain had the lowest business investment rate among G7 richest countries, despite also having the lowest rate of corporation tax. Yet the scale of tax cuts that Kwarteng set out was enormous, and nakedly no more than handouts to the wealthy. Among the changes were:
- A cut in the basic income tax rate from 20% to 19%, effective from April 2023;
- The removal of the 45% top rate of income tax for those earning £150,000 per annum or more, also from April 2023;
- The removal of the cap on bankers’ bonuses;
- The abolition of the Johnson’s government National Insurance increase – the so-called health and social care levy;
- An increase in stamp duty threshold for house buyers from £125,000 to £250,000, and for first-time buyers from £300,000 to £425,000.
The government provided no independent information about the financial impact of these tax cuts, basically silencing the Office for Budget Responsibility. Treasury estimates were that the tax cuts would amount to £45bn a year by 2026/27. The Resolution Foundation estimates that the raft of tax changes is worth £5,220 per annum to someone on £200,000pa and just £157 to a worker on £20,000. Other proposals included the establishment of tax-free investment zones, more punitive Universal Credit conditions on part-time workers, and the lifting of the ban on shale gas fracking. The Financial Times conceded that the mini-budget ‘will delight many in the City of London and the wealthy’.
The Tory leadership campaign
Truss had defeated her opponent Rishi Sunak in the race to become Tory leader and therefore Prime Minister, but by a smaller margin than predicted, 57.5% of Tory Party members against 42.5% for Sunak. Throughout the campaign they had vied with each other to show themselves as the more reactionary candidate: both were in favour of tougher anti-trade union laws, sending as many flights as possible full of asylum seekers to Rwanda and any other country in Africa with whom similar arrangements could be made, and appeasing Loyalists by standing against the Northern Ireland Protocol.
However, they differed on the management of government finances: Sunak (who had been preferred by the majority of Tory MPs) was clear that budgets had to be balanced and that the government could not borrow to finance tax cuts. But Truss opposed what she described as ‘Treasury orthodoxy’ and promised £30bn of tax cuts if she were to become Prime Minister, even as the energy price crisis loomed. Her priority, she said, was to ensure economic growth, and immediate tax cuts were essential to that aim. The possibility that this might accelerate inflation and a run on the pound as government finances came under pressure did not deter the majority of the Tory Party from supporting Truss.
On assuming the premiership on 6 September, Truss appointed Kwasi Kwarteng as Chancellor. He forthwith sacked the top Treasury official Tom Scholar, the epitome of monetarist orthodoxy. On 8 September she announced a huge handout to the energy giants by pledging to cap household energy prices at £2,500 per year for two years. This followed confirmation by Ofgem during the leadership campaign of the £3,560 cap, necessary to protect household energy suppliers against the soaring costs of gas, and one which would have to be set at over £4,000 from January 2023. The government intends to finance this with loans to the energy companies to be repaid through higher domestic bills in the years to come. It would also suspend the ‘Green Levy’. There was no hard information about the amounts involved, but estimates ranged between £130bn and £170bn, double the £70bn cost of Sunak’s pandemic furlough scheme. The decision favoured the better-off who could afford the increased rate; that the millions of households unable to pay bills capped at the £1,920 level would be completely unable to pay the £600 extra was of no interest to this most reactionary of governments.
There were no details until 21 September about support for businesses when a six-month price cap on energy equivalent to the household cap was announced. This was because the Queen died on the day the domestic price cap was set out, suspending parliamentary politics and providing an opportunity for factions of the ruling class to come together to assert their ideological hegemony over the working class. As was to be expected, the BBC and the press went into overdrive to portray at great length and in enormous detail the many unnoticed virtues of the former monarch and the system of which she was head. It was a tyranny of mourning: anyone who stepped out of line was squashed. But it had the desired effect: the CWU and RMT leaderships called off planned strikes without demurral even before they faced any condemnation from the tabloids; Labour leader Sir Keir Starmer told anti-monarchists to ‘respect’ those who wished to attend ceremonies associated with the funeral, essentially giving a licence to the police to repress any display of republicanism, and authorised the singing of the national anthem at the opening of the Labour Party conference.
Recession approaches
The critical state of the economy was revealed in the lead-up to Kwarteng’s mini-budget in a number of figures:
- The economy contracted by 0.1% in 2022 Q2, and is expected to enter a prolonged recession lasting until 2024.
- Inflation at 9.9% remained at an unsustainably high level; that it had fallen below 10% from the previous month was attributed to the falling price of petrol.
- The balance of payments deficit reached £27bn in 2022 Q2, 4.7% of GDP, and up from £26bn in Q1. The expectation is that it will reach 7.5% of GDP in Q4 which will threaten a run on the pound.
- A leap in interest payments on government debt to £19.4bn in June 2022 compared to less than £8bn in May as rates on about a quarter of government debt are index-linked.
Kwarteng’s tax cuts will require an additional £72bn borrowing in the current financial year, revising the total upwards from £161bn in April to £234bn in September. The Resolution Foundation calculates that together with the costs of the energy cap, the tax cuts will add a staggering £411bn to government borrowing over the next five years. This additional borrowing will be far more expensive for the government than before as the two-year cost of borrowing has risen to 3.9% from 0.4% a year ago. On 22 September, the Bank of England announced a rise in its base rate of interest to 2.25% to curtail inflation: the rate is projected to increase to over 5% in 2023. The exchange rate of the pound tumbled to $1.09 in response to the ‘mini-budget’; on $1.35 at the beginning of 2022, it has fallen by 19% over the year.
Truss’s government is a runaway train. Tory MPs not surprisingly expressed their delight at the new orthodoxy, seemingly oblivious to the fact that had cheered on the orthodoxy of the past. The decision on fracking is almost insane: the amount of gas it will generate will be tiny, the costs prohibitive, and the proposal to ease its relaunch will involve raising the maximum level of seismic activity from 0.5 on the Richter scale; Business Secretary Jacob Rees-Mogg claimed seismic activity of 2.5 is a regular event across the world and is hardly noticeable. Local opposition to extraction sites will be ignored. The actions of the Truss government will merely intensify a crisis to which the ruling class has no solution. There is only one answer for the working class: to fight for socialism.
Robert Clough
FIGHT RACISM! FIGHT IMPERIALISM! 290 October/November 2022
