24.9.22
Fiscal Policy

Robin Hood in reverse? The mini-budget unpacked

£45bn worth of tax cuts by 2026/7. Chancellor Kwasi Kwarteng announced the biggest tax cutting event since 1972 in a ‘mini-budget’ aimed at ending the UK economy’s ‘cycle of stagnation’ and boosting growth. The IFS’s Paul Johnson noted the similarities with former chancellor Anthony Barber’s attempted a ‘dash for growth’ via tax cuts, which ultimately failed and led to stagflation. The Resolution Foundation notes that “the decision to combine the largely unavoidable higher deficit caused by rising energy prices/interest rates with permanent tax cuts will drive up borrowing by £411bn in coming years”. (NB. See NEF’s Frank van Lerven’s paper explaining when borrowing is good and when it is bad.)

  • Growth via tax cuts? 'Growth is not as high as it needs to be, which has made it harder to pay for public services, requiring taxes to rise,' said Kwarteng. 'This cycle of stagnation has led to the tax burden being forecast to reach the highest levels since the late 1940s. We are determined to break that cycle. We need a new approach for a new era focused on growth'. (For more resources on the relationship between tax cuts and economic growth, read our previous digest.)
  • This approach lacks evidence. Trickle down economics has been debunked, perhaps most comprehensively by analysis published by the LSE which found that tax cuts for the rich have not had a significant impact on unemployment or growth, but they have increased income inequality. IIPP’s Josh Ryan-Collins provided a thorough critique of the package as a strategy to increase economic growth: “Firstly, it is well established that tax cuts have a weaker impact on growth than public spending, as households and firms save a proportion of the new income. Second, wealthier people tend to spend a smaller proportion of any new income than poorer households, so further weakening the multiplier effect of the borrowing. Third, the major challenge facing the UK economy is a lack of public and private capital investment; and there is no evidence that cutting business or personal taxes results in more investment, employment or growth.” 

Which taxes have been cut? 

Responses: Tax cuts mainly benefit rich men. Many responses highlighted the distributional impact of the tax cuts being “one of the most regressive in living memory”. The Resolution Foundation calculated that almost half (45%) of the gains from personal tax cuts will go to the richest 5% alone, while just 12% of the gains will go to the poorest half of households. Women’s Budget Group have calculated that “Around 80% of those who benefit from the nearly £2.4bn a year spent cutting the 45% tax rate will be men” and that “77% of workers who earn too little to pay income tax, so will gain nothing from the nearly £5.3bn a year spent cutting the basic rate, are women.” The TUC dubbed the budget “Robin Hood in reverse”.

  • Inflation and monetary policy. Financial markets appear to have lost confidence in the government, with the pound at a 37-year low against the dollar at the time of writing and yields on 10-year government debt jumping to almost 4%. IIPP’s Josh Ryan Collins notes that the collapse in the exchange rate will add even more inflationary pressure through rising import costs. The tax cuts are likely to provoke a sharper contractionary response from the Bank of England, which already increased interest rates again this week; the market is potentially predicting an unprecedented emergency hike and foreign central banks have also been applying pressure
  • Free market think tanks in the driving seat. ConservativeHome’s Founder Tim Montgomerie called the mini-budget a “massive moment” for free market think tank, the IEA, who have been advocating for many tax cuts for years. Similarly, the CPS’s Director Robert Colvile called it a “CPS full house”. The TaxPayers’ Alliance’s John O’Connell welcomed “the most taxpayer-friendly budget in recent memory” and called on the Treasury to “get serious on spending and ensure borrowing doesn’t weigh down on generations to come.” 
  • Public not convinced. Snap polling from YouGov gas found that the tax package is being met with scepticism by voters. 52% of voters said they thought the measures would not be effective at growing the economy, compared to just 19% who think it will lead to growth. Meanwhile only 19% of voters think the budget will leave them better off, and an overwhelming majority think that the richest in society will benefit the most. Interestingly, even a majority of Conservative voters agree with this assessment. Further polling by Patriotic Millionaires found strong support (70%) for raising taxes on extreme wealth to help cover the cost of living crisis and pay for public services, with a majority (64%) of Conservative voters also in agreement.
Weekly Updates

Work

Successful four-day week trials. The four-day working week has been backed by 86% of companies that have taken part in a recent “groundbreaking” trial. Companies were asked if they were likely to maintain the four-day week after the trial, which is being run by 4 Day Week Global, a not-for-profit group, in partnership with Autonomy, the think tank, researchers at Boston College and the universities of Oxford and Cambridge, as well as the 4 Day Week Campaign, a body lobbying for a 32-hour working week with no reduction in pay. The companies involved span a range of industries, including retail, hospitality, IT and construction. At the halfway point in the trial, data shows that productivity has been maintained or improved at most of the companies in the trial.

Real Living Wage. The Real Living Wage, a voluntary wage rate set by the Living Wage Foundation, has seen the biggest rise since the scheme began. Around 400,000 workers at businesses that pay the Real Living Wage will see a wage increase of over 10%, to £10.90 across the UK and £11.95 in London. The rate is calculated by the Resolution Foundation, who say that high inflation is the “main reason” for the large increase in the wage.

Energy

Energy Bill Relief Scheme. Following the publication of the Energy Price Guarantee earlier this month, the Government announced a package of energy bill support for businesses on Wednesday: the Energy Bill Relief Scheme. The scheme will see the wholesale price of energy for businesses and public organisations cut in half, by introducing a “supported wholesale price” expected to be £211 a megawatt hour for electricity and £75 a MWh for gas. However, unlike the Energy Price Guarantee for households which caps prices for two years, the Energy Bill Relief Scheme for businesses will currently only provide support for six months. Businesses and opposition parties have criticised the plan, arguing that the six month limit creates uncertainty for firms.

Fracking ban lifted. The Government has controversially lifted its ban on fracking in a bid to improve the UK’s energy security. The announcement coincides with the publication of a new scientific review into fracking by the British Geological Survey (BGS), which concluded that there is still a limited understanding of the impacts of the practice.

Public energy generator could reduce bills. The government is missing out on £63-122bn in revenues due to the privatised nature of UK energy generation according to new research from the TUC. The report argues that if the UK had a public sector energy champion (such as EDF in France, or Vattenfall in Sweden) then the revenues could be used to take between £2250 and £4400 off the average energy bill.

Tax

Tax as a Tool for Racial Justice. A new report by Decolonising Economics and Tax Justice UK explores how tax can be a tool to tackle the UK’s “massive racial wealth gap”. According to Tax Justice UK, for every £1 of wealth held by a white household in the UK, an Indian household has 90-95p; Pakistani households have around 50p, Black Caribbean households have 20p, and Bangladeshi households have 10p. The report explores themes of structural racism and colonialism in the UK economy and argues that we must examine “the ongoing role of extraction in the global South and on marginalised communities”.

Health

NHS plan for patients. In her new position as Secretary of State for Health, Thérèse Coffey has launched a “plan for patients”: a package of measures for the NHS focused on ‘ABCD’: ambulances, backlogs, care, doctors and dentists. The package included an “expectation” that anyone seeking a GP appointment should get one within two weeks – currently 15% of patients are unable to get an appointment within this time frame. The Health Secretary also announced £500 million aimed at freeing up hospital beds - an “adult social care discharge fund” which would pay care services to look after patients who have been discharged from hospital. 

Local economies

Towns. The Social Market Foundation has published its first Town Vitality Report which analyses the different types of towns across the UK and the policy responses that could support them, arguing that towns, unlike cities, “often fall by the wayside in policy discourse”. The report measures the “economic vitality” of over 900 towns, splitting them into six categories: vibrant, opportunity, backbone, foundation, heartland, and gateway towns. 

Retrofitting and levelling up. Not only can retrofitting homes help the UK to meet its Net Zero targets and support households through the cost of living crisis, it can also play a role in addressing regional inequalities, according to new research by the IPPR. The think tank makes five key recommendations to address the “skills bottlenecks” in the retrofitting industry: improve training and jobs standards, increase practical and local on-site training, improve quality assurance of training, provide support for local training courses and reintroduce skills academies.