Kwarteng’s budget: ignore the past, pillage the future, gamble on the present
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When first talking to the Editor about writing an article about Kwasi Kwarteng’s ‘Fiscal Event’ which took place yesterday he said “Please call it a budget, not a ‘mini budget’ or a ‘fiscal event’. If it walks like a budget, talks like a budget, it’s a budget.” So let’s get one thing off our collective chests: yesterday’s address to parliament by the Chancellor of the Exchequer was a budget; and a very important one. We have not seen such tax slashing since Nigel Lawson’s budget delivered on 15th March 1988, leading many to compare the economic policies of Thatcherism with “Trussonomics”.
The budget of 1988 had been in the making since 1979, and absolutely front and centre of that nine year plan was, as Lawson said in his budget statement, “a determination to defeat inflation”. This was the cornerstone of Thatcherism, which she called the “parent of unemployment and the unseen robber of those who have saved”. Mrs Thatcher got inflation under control by getting public finances in order and clamping down on public borrowing. Only once all this happened, after 9 torrid years, did we have the 1988 tax cutting budget.
Pretty much every level-headed economist states the budget yesterday will have an inflationary impact on the UK economy, which already stands at 9.8 per cent and, at present, is the highest in the G7. A budget which has a chance of adding to the inflationary pressures of the wider economy stands utterly against the principles of Thatcherism, pure and simple.
Lawson stated in his budget of 1988 that UK economy was “stronger than at any time since the war”. This was because it was about to enter its eighth successive year of sustained growth, and the sixth which been combined with low inflation. The UK was the highest growth economy in Western Europe and compared highly favourably across the developed world. This expansion was fuelled by manufacturing output rising by 5.5 per cent, which Lawson put down to “prudent financial policies”, giving “business and industry the confidence to expand, while supply side reforms have progressively removed the barriers to enterprise”.
The economic outlook of the UK economy between then and now could not be starker. In the last quarter, UK GDP shrank by 0.1 per cent, with the Bank of England saying it’s going to get far worse over the next six months. We are becoming the basket case of the G20, with the OECD predicting the British economy to shrink faster than all the other nations in the club…other than Russia. UK exports are in the doldrums, despite Sterling falling through the floor, thanks to the continuing bureaucratic nightmare of trying to get anything out the country. We’re in for a long, hard recessional winter.
In 1988 Lawson gave his budget off the back of seven years of budget surpluses which had pulled public debt to its lowest point since the war. The Kwarteng splurge will push public sector debt past 100 per cent of GDP, which is the highest since 1962.
Kwarteng’s debt binge is a toxic mix when added to, and further increasing, UK inflation. The Bank of England will have no choice but to plough up interest rates as the inflationary impact of the tax cuts take hold. This will mean the cost of the Kwarteng gamble will get ever and ever higher; pitting Threadneedle Street against Downing Street and scaring the markets as it plays out.
The last time a budget like this was delivered was in 1972 when Anthony Barber delivered the “spend to grow budget”. This was designed to return the Conservatives to power at a general election planned for two years in the future. The budget led to a brief period of growth, known as the “Barber Boom”, followed by a wage-price spiral, high inflation and currency depreciation. All this culminated in the 1976 sterling crisis when Harold Wilson’s Labour government had to go cap in hand to the IMF for a bail-out. It doesn’t take a soothsayer to foresee Sir Keir Starmer’s coalition government doing exactly the same thing in 2026.
The 1976 Sterling crisis was recent history when Lawson was delivering his budget in 1988, and in his words “this profligacy [of 1976] not only brought economic disaster and the national humiliation of a bail-out by the IMF; it also added massively to the burden of debt interest, not merely now but for a generation to come”.
The international markets’ judgement of Kwarteng’s package of huge unfunded tax cuts and spending pledges has been withering. Last night the pound was languishing at just $1.09, a 37-year low, and 3.5 cents lighter than Thursday, while UK government bonds had a shocking day. It’s a disaster to have international financial community turn its back on the UK in such a unified way, when only 6 years ago it called London home.
The media framing of the Kwarteng cash spree is centred on a cash give-away to the rich, at the expense of the poor. It’s the progressive vs regressive argument from the austerity agenda during the Osborne-Cameron era. Yesterday’s announcement, however, puts a second dimension on this narrative, with the Treasury effectively borrowing money from future generations to create a short-term, debt fuelled bonanza. This is taken directly from the Corbyn playbook. Whether you are splurging the cash to boost the private sector or upgrade public services, both Truss and Corbyn are making our children and grandchildren pay for their political agenda. This sort of future generational fiscal can-kicking is fine when you’re borrowing money to defeat Nazism, or beating a global pandemic, there’s even an argument to be made for long-term infrastructure projects. However, it is simply not morally correct for Truss to hand out tax breaks now, which might or might not create growth, paid for by our children and our children’s children.
Edmund Burke, the father of Conservatism, understood that political institutions should serve not just the present, but the present because of the past, and the present looking towards the future. He termed this the “Contract of Eternal Society,” a means by which no single generation claims tyranny over past generations or future ones. What Truss and Kwarteng did yesterday is to turn Conservatism on its head. They ignored the past and pillaged the future to gamble on the present. It won’t end nicely.
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