Kwasi Kwarteng’s first “mini-Budget” turned out to be the biggest British tax-cutting event for 50 years, prompting senior government figures to talk of the chancellor’s “shock and awe” approach.
It certainly shocked the markets. By the time Kwarteng had delivered his tax-cutting, debt-fuelled “plan for growth” in the House of Commons on Friday, sterling was tumbling and government borrowing costs were spiking.
The political shock was reverberating, too. One former Treasury minister called Kwarteng’s growth plan a “high-risk gamble”. Julian Smith, another former Tory minister, said tax cuts for the very rich at a time of national crisis were “wrong”.
But Kwarteng, speaking to the Financial Times, appeared unruffled. “I’m always calm,” he said. “Markets move all the time. It’s very important to keep calm and focus on the longer-term strategy.” He denied the markets were panicking.
The 47-year-old chancellor has long advocated a small-state, low-tax approach to running the economy, most notably in a 2012 free-market tract — Britannia Unchained. Liz Truss was among the co-authors.
Even before Truss officially became prime minister on September 6, Kwarteng said they were working closely together on a package of tax cuts and deregulation designed to jolt Britain out of its economic torpor.
Jacob Rees-Mogg, business secretary, Simon Clarke, levelling up secretary, and Thérèse Coffey, deputy prime minister, also collaborated on the plan, determined to oversee an immediate supply-side revolution.
Markets reacted with concern as Kwarteng piled another £72bn of borrowing on to the government’s books to fund his tax cuts and economic growth measures. But the chancellor insisted the bigger danger was to do nothing.
“What I was worried about was low growth,” he said. “The danger is in choking growth — that’s the danger. The only way we deal with that is by growing the economy.”
In a sideswipe at former prime minister Boris Johnson and ex-chancellor Rishi Sunak, who put Britain on course to having the highest tax burden since the late 1940s, Kwarteng added: “What was obvious to me was that the path of constantly ramping up taxes was unsustainable. That to me was the big gamble: to stay on the path we were on.”
Markets are not sure where exactly the new chancellor’s path will lead, not least since he has suspended the government’s fiscal rules that committed it to having debt falling as a share of gross domestic product within three years.
Kwarteng revealed he plans to have a new medium-term fiscal strategy in place “in the new year”, giving the markets a clearer idea of when he will start reducing the UK’s growing debt pile.
“I think that’s a very important part of this whole picture,” he said. “I said to the prime minister we’ve got to have a medium-term fiscal plan and she completely agreed.”
The chancellor insisted there was nothing wrong in him cutting taxes by £45bn to boost an economy traumatised by the Covid-19 pandemic and the energy crisis while the Bank of England raises interest rates to curb high inflation.
Some economists have argued that Kwarteng and Andrew Bailey, Bank of England governor, are heading for a clash if their respective policies appear to be pulling in different directions. Was there not a contradiction?
“I don’t think so at all,” said the chancellor. “There have been two exogenous shocks: the Covid pandemic and Putin’s invasion of Ukraine. It’s entirely reasonable in that context to have slightly looser fiscal policy to deal with those shocks.
“On the monetary side it’s entirely reasonable for the bank to do what it classically does. It’s not contradictory at all. We would not have done our duty had we not intervened in a fiscally liberal way to the Covid-19 pandemic and Putin’s invasion of Ukraine.”
Kwarteng, a former chair of the Bow Group, a rightwing think-tank, was elected as an MP in 2010 and appointed by Johnson to his cabinet as business secretary in 2021.
He has long waited for a chance to put his ideas into practice and in Truss he has a wholehearted supporter and longtime friend. With a general election due by 2024, both recognise there is no time to waste.
Truss accompanied Kwarteng on a visit to a modular housing factory in Ebbsfleet, Kent, to publicise the chancellor’s growth plan on Friday. Ebbsfleet is one of almost 40 areas that hopes to become one of his new low-tax investment zones.
One ally of Kwarteng said that Truss was never going to be swayed by focus groups or opinion polls. “That’s what Boris Johnson did — and look what happened to him,” said one colleague.
Kwarteng became chancellor on September 6. His first act, within hours of walking into the Treasury, was to sack the popular permanent secretary, Sir Tom Scholar.
Kwarteng told shocked Treasury staff that the department needed “fresh leadership”. It is likely that Scholar, a devotee of “sound money” orthodoxy in 1 Horse Guards Road, would have blanched at Friday’s borrowing spree.
But Kwarteng insisted lower taxes drive growth, citing Dublin’s position as a low-tax European headquarters for global companies as evidence.
“What was completely unsustainable was this idea we could simply tax our way to prosperity and burst through the fact that it was a 70-year high of tax. Where did you want that to end?” he asked.
He was also unapologetic for having scrapped the 45 per cent top rate of income tax and abolished the cap on bankers’ bonuses — moves he hopes will bolster the City of London.
“I’ve always said there hasn’t been a time when UK plc has done well when we haven’t had a strong financial services sector,” said Kwarteng, adding the bonus cap just meant that banks paid staff “very high basic salaries” instead.
The measures in Friday’s maxi-sized “mini-Budget” will at least ensure that City executives will enjoy a pay rise, as they digest a completely new fiscal policy — a high risk economic strategy which will shape Britain’s future and determine the fate of Truss’s government.