In 1970 the British economy was stuck in a rut: with inflation climbing and unemployment stubbornly high, Edward Heath’s Conservative government was trying to find ways to end stagflation and drive up growth. Anthony Barber, a former prisoner of war who had retrained as a tax lawyer after the Second World War, had been parachuted into the position of chancellor after his predecessor, Iain Macleod, died a month into the job. He wasn’t hugely enthusiastic about it; he is said to have told a friend: “I hope [Heath is] not going to make me chancellor.” It was a sentiment the rest of the country would soon share.
Like the current Chancellor, Kwasi Kwarteng, Barber saw tax as the enemy of growth. “Too often it stultifies enterprise,” he said as he announced his 1971 Budget. “Too often it discourages the pursuit of profit. Too often it penalises savings, on which the nation’s wealth and the growth of our economy so largely depend.” Kwarteng echoed that today. “We believe that high taxes reduce incentives to work, they deter investment and they hinder enterprise,” he said.
The similarities between Barber and Kwarteng do not end there. Barber’s solution to taxation’s stultifying influence was to reform the banking system, causing lending to almost double, and in 1972 he announced a “dash for growth”, pledging to boost GDP growth to 10 per cent over the following two years and cutting income tax by £1bn, one of the largest tax cuts ever announced.
Until now, that is. While Kwasi Kwarteng’s GDP growth ambitions are more conservative – just 2.5 per cent “over the medium term” – headline announcements today included plans to scrap a rise in corporation tax, reduce stamp duty, reverse a rise in National Insurance and abolish the highest rate of income tax. Together, his tax cuts are thought to be worth £50bn – the biggest round of tax giveaways since Barber. It will be funded, according to a footnote in the government’s briefing document, by raising borrowing from £161.7bn in April this year to £234.1bn this month.
Students of economic history will know that the “Barber Boom” did not end well. His tax cuts were funded by soaring government borrowing. Although he insisted in 1972 that “I do not believe that a stimulus to demand of the order I propose will be inimical to the fight against inflation”, he was proven wrong: by 1974, the year of the next general election, inflation was hovering around 16 per cent, sterling was plummeting and voters weren’t happy. Harold Wilson’s Labour government was voted in, but inflation remained high until the 1980s, when Margaret Thatcher and Geoffrey Howe took their cues from Paul Volcker in the US and hiked interest rates – and taxes – aggressively.
The question of whether Kwarteng will suffer the same fate as Barber depends on whether his policies really do stimulate growth, as he insists. The cuts unashamedly target the wealthier end of society, because he and Liz Truss believe, as the Prime Minister put it earlier in the week, that “people on higher incomes generally pay more tax, so when you reduce taxes there is often a disproportionate benefit because those people are paying more taxes in the first place”. The cuts are also, many of Truss’s detractors argue, unashamedly inflationary, because they are putting more money into people’s pockets at exactly the time the economy doesn’t need that.
The initial reaction to the speech doesn’t inspire much confidence: the pound has dropped, gilt yields have climbed (meaning that government borrowing will be more expensive than it would have been yesterday, before Kwarteng’s speech) and the FTSE 100 has sunk. Barber’s reputation never recovered from his stint as chancellor. After the election in 1974 he quit politics, went on to become chairman of Standard Chartered bank, and was mainly remembered, despite a 20-year political career, for his great economic mistake. For the nation’s sake, let us hope Kwarteng’s attempt to produce growth from tax cuts has a happier ending.