A motorist checks a petrol pump at a filling station in London, on June 9. Britain’s new Prime Minister Liz Truss has pledged to rebuild an ailing economy, on the brink of a potentially long recession, with record inflation and millions in need of government help to cope with energy bills. Photo: AP
Andrew Hammond
Andrew Hammond

Truss gambles big on emergency UK budget with promise of huge tax cuts

  • As the UK prepares to unveil emergency economic measures, tax cuts seem all but certain – what remains hazy is how they will be paid for and whether they will bring down inflation
  • A lack of detail on government spending and plans to boost growth is also fuelling uncertainty in a time of severe economic hardship

UK Chancellor Kwasi Kwarteng is set to deliver the first major fiscal event of the new government on Friday, with the Truss team in a risk-taking mood.

In his emergency budget, Kwarteng will start delivering on Prime Minister Liz Truss’ pledge to bring an end to what she calls a UK consensus that has “peddled a particular type of economic policy for 20 years that hasn’t delivered”.

One early signal of intent was the government’s sacking last week of Treasury permanent secretary Tom Scholar, who was seen as a purveyor of this orthodoxy, including being against deficit spending.

With UK GDP virtually stalling in July, and inflation nudging double digits, Truss and Kwarteng have put revitalising growth at the heart of their economic agenda and pledged to “start cutting taxes from day one”.

While the scope of the announcements is unclear, Truss has previously pledged to reverse April’s rise in national insurance and abolish next year’s planned corporation tax hike from 19 per cent to 25 per cent.

Overall, more than 20 different measures are expected to be unveiled. This potentially includes a controversial plan to abolish the cap on banker bonuses, and taking an axe to “nanny state” measures such as the UK’s sugar tax. Kwarteng will also detail plans for a £150 billion (US$170 billion) cap on energy prices.

New UK Chancellor Kwasi Kwarteng seen outside 10 Downing Street in London on September 6. Photo: Reuters

Bold as Kwarteng’s plans may be, there remain big question marks. For starters, it is not clear how the government will pay for the £30 billion in tax cuts Truss has promised. She insists they can be paid for within the current fiscal rules, which require that debt should fall as a proportion of national income in 2024-25.

However this seems a stretch, and is based on the UK economy proving to be more resilient than expected, potentially helped by the knock-on effects of the coming coronation of King Charles.

Then again, it is plausible that Kwarteng may simply move the goalposts in the annual budget later this year by extending the debt target into the next parliament. Giving weight to this theory, Kwarteng is refusing to publish updated official forecasts for the economy and public finances alongside the mini budget.

The House of Commons Treasury Committee, chaired by Conservative MP Mel Stride, wrote to the new finance minister in recent days asking him to release the figures already compiled by the Office for Budget Responsibility (OBR). However, the Treasury will reportedly keep the forecasts secret until the full annual budget is rolled out some time in the next six months.

Stride has, rightly, criticised this stance given the deterioration in the UK’s economic outlook since the last OBR forecast in March. There have been significant fiscal interventions since then and with further interventions, including potential major permanent tax cuts, to be announced on Friday, the case for an independent OBR forecast is overwhelming.
Shoppers walk past promotional offers in a supermarket in London on February 10. Photo: Reuters
Also contrary to the belief of many economists is Truss’ claim that the tax cuts can help curb inflation, and that “what is not affordable is putting up taxes, choking off growth, and ending up in a much worse position”. This is hotly disputed, and indeed former chancellor Rishi Sunak, who had a high-flying financial career before he entered politics, has called her plan “comforting fairy tales”.

Important as this debate is about taxation, however, it has obscured even more important issues for the United Kingdom, like boosting economic productivity. This is a massive long-term challenge, and it is far from clear Kwarteng will address it on Friday.

The Confederation of Business Industry trade body has warned that there is not enough focus on the importance of higher productivity as the most sustainable way to deliver better standards of living, tackle the fiscal challenges of an ageing population, decarbonise, lower the tax burden and drive growth.

The Truss team has also been less than clear about its intentions for public spending. This includes the future of the so-called “levelling up” agenda, which centres around investment in parts of central and northern England (the “Red Wall”) that lag economically behind the wealthier south.

Britain’s economy in a mess amid recession risk, inflation, energy crisis

A number of Conservative MPs are concerned that the mini budget will not do enough to support those on lower incomes, especially if the cap for highly paid bankers is lifted. The specific worry is that lifting the bonus cap will send the wrong message to voters, especially in the cherished Red Wall seats that the party needs to keep.

Kwarteng’s budget represents a significant gamble as the nation faces the most difficult economic landscape in years. As he rolls the political dice, it remains highly uncertain whether it will deliver growth or, in turn, transform the government’s political prospects, allowing the Conservatives to win a fifth straight term in office at the next general election.

Andrew Hammond is an associate at LSE IDEAS at the London School of Economics