Truss team takes gamble with emergency budget

New UK Chancellor Kwasi Kwarteng delivers on Friday the first major fiscal event of the new government, with Prime Minister Liz Truss’s team in a risk-taking mood.

In his emergency budget, Kwarteng will start delivering on Truss’s pledge to bring an end to what she calls a failed UK consensus that has “peddled a particular type of economic policy for 20 years that hasn’t delivered.” One early signal of intent here was the government’s sacking last week of Treasury Permanent Secretary Tom Scholar, who was seen as a purveyor of this orthodoxy, including his opposition to deficit spending.

With UK gross domestic product virtually stalling in July and inflation nudging double digits, Truss and Kwarteng have put revitalizing growth at the heart of their economic agenda and pledged to “start cutting taxes from day one.” While the scope of Kwarteng’s announcements on Friday are unclear, Truss has previously pledged to reverse April’s rise in National Insurance and abolish next year’s planned corporation tax hike from 19 percent to 25 percent. He will also detail more of the plans for a £150 billion ($170 billion) cap on energy prices.

Overall, more than 20 different measures are reportedly to be announced in the fiscal event. These might include a controversial plan to abolish the cap on bankers’ bonuses and taking an axe to so-called nanny state measures, such as the UK’s sugar tax.

Bold as Kwarteng’s plans may be, however, 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 assumption that is based, in part, on the UK economy proving to be more resilient than expected, perhaps helped by the knock-on effects of the upcoming coronation of King Charles III.

It is not clear how the government will pay for the £30 billion in tax cuts the PM has promised. 

Andrew Hammond

But it is plausible that Kwarteng may simply move the goalposts in November’s annual budget by extending the debt target into the next parliament. One reason this appears possible is that Kwarteng has refused to publish updated official forecasts for the economy and public finances alongside his mini-budget this week. The House of Commons Treasury Committee, which is 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. However, the Treasury will reportedly keep the forecasts secret, not publishing an update until the next full budget.

Stride has rightly criticized this stance, given the deterioration in the UK’s economic outlook since the last forecast in March. There have been significant fiscal interventions since then and, with more expected in Kwarteng’s statement on Friday, the case for an independent forecast is overwhelming.

Also contrary to the expectations of many economists is Truss’s claim that 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 former Chancellor Rishi Sunak, who had a high-flying financial career before he entered politics, has called her plan “comforting fairy tales.”

As important as this debate about taxation is, however, it has obscured even more important issues for the UK, such as boosting economic productivity, which is a massive long-term challenge. It is far from clear whether Kwarteng will address this on Friday. The Confederation of British Industry trade body has warned that he has not focused enough on the importance of higher productivity as the most sustainable way to deliver higher standards of living, tackle the fiscal challenges of an aging population, decarbonize, 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 centers on investment in areas of central and northern England that economically lag behind the wealthier south.

It concerns a large number of Conservative MPs that the mini-budget will not do enough to support those on lower incomes, especially if the cap on bonuses for highly paid bankers is lifted. The specific worry is that lifting the bonus cap will send the wrong message to voters, especially those in the cherished “red wall” seats, which the ruling party won in 2019 and needs to keep at the next election.

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

• Andrew Hammond