The only thing certain about Liz Truss’ U-turn over the 45p tax rate is: it’s going to be worse for her than it looks. The Prime Minister told the BBC point blank on Sunday morning that the tax cut for the highest earners would go ahead; Kwasi Kwarteng, the Chancellor, told the press it would stay as late as 10.30pm on Sunday night (2 October). So the midnight capitulation throws the whole Tory growth strategy into disarray, and severely undermines their competence and cohesion.
Architects of the tax cut, such as Mark Littlewood of the right-wing think tank the Institute for Economic Affairs, are now saying the sums involved are a “rounding error”. Kwarteng has called the cancelled tax cut “a distraction”, to be easily brushed aside.
But the Tories’ entire growth strategy revolves around boosting incentives for the rich, and overtly rejecting redistribution of wealth to the poorest. So handing the richest 1.5 per cent of taxpayers a cool £7 billion over the next five years was no rounding error. It was meant to be a signal of intent – both to the markets and voters – and now it’s gone.
What unnerved the markets last week was not any single tax giveaway but the cumulative effect on confidence of scheduling £161bn of tax cuts without (a) an independent assessment of their effects on growth; (b) concrete proposals on borrowing and future spending cuts; and (c) any proof that the massive deregulation drive Truss is planning will work. Indeed, most professional opinion – outside the deeply ideological circle of ultra-right wing economists Truss listens to – is that it will not work. Truss is right that Britain’s problem is stagnant growth. But unless the Tories reverse out of hard Brexit, the only possible drivers of increased growth are investment, increasing workers’ skills, and higher incomes for lower paid workers and blighted communities. Wealth does not “trickle down” in an economy as blighted by inequality as ours: it surges upwards, whenever there is growth.
So, even with the Bank of England busy buying up government debt, the yield on a ten-year UK government bond is above 4 per cent as I write, double what it was in mid-August, meaning the bonds are falling in value. The markets are punishing Truss neither for the original move, nor for the U-turn. They are punishing the Tories for running out of economic road. They’re in a Brexit cul-de-sac of their own design, and out of ideas for how we get out of it.
Politically, this is not just a mixture of farce and circus. It shows that deep faultlines remain within the parliamentary Conservative Party.
The 14 MPs who publicly opposed abolishing the 45p tax rate were not Red Wall-ers, whose constituents are at the other end of the income scale from those who would have gained. They were One Nation Tories from places like Suffolk, Wiltshire and Dorset. Behind them stand 132 Tory MPs who publicly backed Rishi Sunak for the Conservative leadership, and who plainly believe Truss’s entire plan is rubbish. Red Wall voters should be seething at this.
For Labour, the event is a double whammy. If the Tories now say “we listened”, Labour can say “to us”. And if the whole government strategy now looks incoherent, Labour’s does not. Last week Rachel Reeves, the shadow chancellor, outlined a clear alternative: a return to growth through state-led green investment and wealth redistribution.
And it’s not over. When the Office for Budget Responsibility gets its hands on Kwarteng’s full programme of spending cuts, borrowing costs and real – as opposed to “illustrative” – growth projections, the basic problem of his plan will be revealed: it won’t work because it’s not fair.
[See also: Liz Truss has already proved to be the worst Tory prime minister yet]