It’s been three and a half weeks since the then-chancellor Kwasi Kwarteng stunned British politics, and the financial markets, with a “mini-Budget” containing the biggest tax cuts since 1972. The scale of the chaos that has followed is painfully demonstrated by the fact that the now-chancellor Jeremy Hunt has just confirmed the biggest programme of tax rises since the early 1990s. Stable British economic policy is not.
Budgets often unravel slightly in the days after they’re announced as specialists get to read the small print. But the mini-Budget unravelled almost immediately, in large part because Kwarteng chose not to produce any small print: the Office for Budget Responsibility was not asked to update its economic forecasts and the Treasury set out no detail on how £45bn of tax cuts would be paid for.
The result has been all over our TV screens. A meltdown in financial markets, a Tory collapse in the polls, a new chancellor and three (to date) rounds of U-turns. The last of these was Hunt’s decision yesterday (17 October) to jettison 60 per cent of the mini-Budget’s tax cuts and almost the entire project of Trussonomics. By also binning the planned cut to the basic rate of income tax that was planned by Rishi Sunak, the Treasury has confirmed that taxes will rise, not fall: tax and benefit policies announced during this parliament will reduce the income of a typical household by around £1,000, and tax as a share of the economy will rise over the parliament to its highest sustained level since 1950. A traditional Tory message of “tough choices” has replaced Liz Truss’s dash for growth.
The scale of the change under way was reinforced by the surprise announcement that the energy price guarantee will end next April, rather than in October 2024. This will save the Treasury significant sums and reduce the exposure of the public finances to volatile gas markets – but households will face that exposure instead. The energy price cap could reach £4,000 next April.
Why has the Chancellor done all this, and why has the Prime Minister accepted the end of her political project before it had begun? Because their priority now is to take the pressure off the Bank of England to raise interest rates and the Treasury to cut public spending. Indeed, lower interest rates – as market confidence in the UK’s public finances grows – means fewer spending cuts as the debt interest bill will be reduced. A 0.5 percentage point fall in rate, for example, would reduce borrowing costs by around £8bn. But even after these U-turns, Hunt will announce significant spending cuts on 31 October in order to reduce debt as a share of the economy.
The new Chancellor has entirely rewritten the government’s economic policy in recent days. That may have been hard to agree with the Prime Minister, but with tens of billions of spending cuts to come, and a new energy support package required, many of Hunt’s hardest choices still lie ahead.
[See also: The race to succeed Liz Truss begins]