Mini-budget: Kwasi Kwarteng buries levelling up as chancellor bets all on growth

Credit: PA/AP

Kwasi Kwarteng and Liz Truss have just driven a juggernaut through the cross-party consensus about how to manage the British economy that has prevailed since the 1990s.

That consensus was broadly that it was important for day-to-day government spending not to be funded through borrowing, that it was more important to lift the living standards of those at the bottom than to reward the richest, and that the greatest threat to sustainable prosperity is rampant inflation.

Kwarteng and Truss, instead, have decided that the important danger to the UK is the low economic growth that has prevailed in the UK since the 2008 financial crisis, a sluggish performance that has been reinforced by the 2016 decision to leave the EU.

Everything Kwarteng announced today is intended to spur bigger increases in the size of the economy, to lift up all boats (in the cliché) - so that public services are affordable not through increasing tax rates, but through the greater yield that lower tax rates would deliver if the economy grows faster.

So, unlike Boris Johnson, they have decided that Brexit is an opportunity to dismantle the UK's tax and regulatory structure - and build what has been nicknamed Singapore-on-Thames, a Britain in which growth is spurred by cutting taxes and burdens on so-called wealth creators.

Theirs, for better or worse, is the first UK government to properly face up to the logic of Brexit, which is that it was only worth doing if the economic governance of the country was to be radically changed.

That means, in a nutshell, we'll soon know whether Brexit was the triumph claimed by its proponents or a disaster.

The point is that the Truss's and Kwarteng's Plan for Growth carries massive risks.

I will focus on a couple.

First, the massive tax cuts will increase public sector borrowing by around £40bn every year, unless and until growth is spurred and tax revenues rise.

And those unfunded tax cuts will stimulate demand at a time when inflation is 10% and still rising.

Which is why the markets have already reacted by pushing up interest rates across all maturities.

It is a racing certainty that the Bank of England will raise interest rates again in November, perhaps by double the 0.5% increase it announced yesterday - to ward off the inflationary threat.

That will hurt anyone - individual or business - with big debts. And despite the important cuts to stamp duty Kwarteng has made, house prices are likely to fall, still we're through the cycle of rising interest rates.

Second, there are a whole range of measures that could sow strife and exacerbate divisions in Britain, especially between rich and poor.

There are so many of these potentially divisive measures that it's hard to know where to start.

Among them is the abolition of the 45% top rate of tax - which will deliver tens of thousands of pounds of additional income to hundreds of thousands of top earners.

There's the abolition of the cap on bankers' bonuses.

Then there's the promise to place significant new hurdles in the way of trade unions' rights to take industrial action - at a time when the incomes of most employees are failing to keep track with inflation.

There's the introduction of welfare penalties - cuts in universal credit - for those who don't look more enthusiastically for work.

And there's a strong hint that all sorts of other employment protections, such as the 48-hour limit on weekly working hours, may be scrapped - since it stems from an EU regulation, and all EU rules are being swept away.

So if those are some of the potential costs, what do Kwarteng and Truss think they are doing?

Their conviction - and it is a conviction - is that cutting taxes and red tape will stimulate the economy and create incentives for businesses to invest more.

And it is important to point out that many of their measures - the massive subsidy to reduce energy prices, the cut in the basic rate of income tax, the reversal of the 1.25% national insurance rise, even the cancelling of a planned 6 percentage point rise in the rate of corporation tax - will give money to more-or-less all in work, though again those on above-average incomes are likely to do best.

They've also announced plans to sweep away restrictions on construction of housing and commercial buildings, to speed up the construction of transport and digital infrastructure, to encourage huge pension funds to take more risks with their investments.

If these measures work - and it is an if - everyone should benefit, even presumably those who depend on welfare payments, who got nothing directly from the chancellor today.

Kwarteng and Truss are rolling the dice, in a right-wing libertarian way, to endeavour to make a success of Brexit.

My own hunch is that the stimulus they've announced will spark a sharp economic bounce next spring, after a grim winter.

But it may not be a sustainable long-term boom.

My hunch is that Truss will therefore give serious thought to going to the country in a general election a year earlier than she's said, next autumn, just in case her boom fizzles out.

But that's a hunch not a forecast.

Here's something more certain: Boris Johnson's levelling up is dead and buried. Levelling up was explicitly about closing the gap between rich and poor. Today's measures, if they achieve nothing else, will widen the gap.

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