Fiscal announcements from Chancellor Kwasi Kwarteng, due to be set out formally in a “mini-budget” today, amount to a “gamble” with the nation’s finances that are unlikely to lead to significant boosts to GDP, a committee of MPs has heard.
Speaking to the House of Commons’ Treasury select committee on Thursday, senior economists questioned whether the planned measures would succeed in promoting what Prime Minister Liz Truss and her Chancellor have billed as a relentless focus on economic growth. In her first weeks in Downing Street, Truss has set a new 2.5 per cent annual target for GDP increases – a level that has not been achieved consistently since the 2008 financial crisis.
The Bank of England on Thursday announced that the country was in recession. The package of supply-side policies trailed in advance of Kwarteng’s “fiscal event” on Friday include a cancellation of planned hikes to National Insurance Contributions, Corporation Tax, and the Health and Social Care Levy. The Chancellor is also likely to reveal plans to remove the cap on bankers’ bonuses, and to establish a host of low-tax investment zones with reduced regulatory burdens for companies. The cost of the announcements is thought to be in the region of £30bn, but Truss insists she has no plans to make cuts to public services to compensate for lost revenues.
An estimated £150bn will also be used to subsidise energy bills and keep them within a new £2,500-a-year price cap. Without the cap, a rise in global wholesale prices would have seen households paying up to £7,000 in bills next year. The PM has, however, refused to pay for the energy package by implementing further windfall taxes on the now record profits of energy generators.
The Institute for Fiscal Studies says that taken together, Truss’s fiscal plans will leave public debt on an “unsustainable” path. “What the Chancellor is doing is saying ‘I’m far less concerned than the last Chancellor about having debt falling and I’m far less concerned about having cash for public services to hand’,” Torsten Bell, the chief executive of the Resolution Foundation think tank, told the committee.
The announcements break all the traditional rules on so-called “sound money” and balanced budgets that have been the hallmark of the Conservative Party’s economic offer for several decades. Many have speculated that large increases in public spending – coupled both with tax cuts and the increased cost of servicing debt – could lead to roiled bond markets and a potential run on the pound. As the Bank of England raises interest rates to 14-year highs, its Monetary Policy Committee has also warned Truss’s plans will likely have an inflationary effect on prices.
Asked how energy subsidies should be funded to avoid excessive borrowing, Bell suggested “solidarity taxes and windfall taxes” – both of which were dismissed as un-Conservative by Truss in the recent Tory leadership contest.
Meanwhile, Louise Hellem, chief economist at the Confederation of British Industry, a body representing many large companies in the financial services sector, expressed doubt over whether the removal of the bankers’ bonus cap would lead to a “big bang”-style boom in the City. “We’re really keen that the financial services sector remains competitive,” she told the Treasury select committee, “but there’s a question of timing for those kinds of measures, and there are much wider policies that members in financial services would like to see before this one.”
Neil Shearing, group chief economist at Capital Economics, a consultancy, shared similar worries over whether the proposed tax cuts would spur significant levels of economic growth. “We’ve had 15 years of very low growth” he said, “but these tax cuts take us back to the levels we were at 18 months ago, when growth was still very low. So the idea that it’s going to spur this huge revival in economic growth I find difficult to believe.”
Many countries with far higher tax takings have also enjoyed higher levels of average growth over the past decade, including France, Germany, the Netherlands and the Scandinavian states. Low tax isn’t a panacea for sluggish growth, the committee was told, with labour markets, skills, infrastructure and investment all affecting a country’s GDP in profound ways.
“This is not a game,” said Bell. “No living policymaker has been through a phase of trying to implement a discretionary fiscal loosening (of tax cuts) on top of an unavoidable fiscal loosening (of energy subsidies), on top of a phase where the Bank of England says there is no spare capacity and is raising interest rates.”
The policy mix is “a gamble, a risk”, he added. “It’s unusual – to be polite.”