Lord Hannan of Kingsclere is a Conservative peer, writer and columnist. He was a Conservative MEP from 1999 to 2020, and is now President of the Initiative for Free Trade.
You really think this is about tax cuts? That the fall in sterling and the surge in the price of government borrowing were responses to cutting income tax to 19p and returning to the 40p higher rate that pertained throughout all but the final month of the Blair/Brown years?
Come off it! Just look at the numbers. According to the Treasury, by far the biggest revenue commitment in Friday’s mini-budget was the energy price freeze (costing £31 billion for households, £29 billion for businesses). Then came the non-rises in National Insurance (£19 billion) and corporation tax (£19 billion).
Compared to these figures, the actual tax cuts – as opposed to the cancellation of proposed rises which no one, surely, would propose from first principles today – were trivial: £5 billion for the income tax cut; £2 billion for the long-overdue IR35 rollback; £2 billion for the scrapping of the top rate; £1.7 billion for the rise in the stamp duty threshold.
To listen to the BBC or the Labour Party, you’d think that the fall in the pound was caused, not by the £60 billion energy price freeze, nor yet by the £400 billion dropped on the lockdowns, but by the £2 billion which will supposedly be lost in removing the highest tax rate.
(I write “supposedly” because Treasury estimates have a tendency to downplay the secondary effects of tax cuts. I suspect that scrapping the 45p rate will pay for itself, not just over time as more business comes to the UK, but immediately as rich people find that it is no longer worthwhile to pay for ingenious schemes to reduce their tax liability.)
To blame these tiny tax reductions for the fall in the pound is akin to a fly alighting on an exhausted shire horse as it lies down to sleep, and telling itself that it wrestled the mighty beast to the ground.
The pound has been weak since the 2008 financial crisis, a victim of the high-spending-low-interest-rates combo that characterised Osbrownomics. Britain decreed a harsher lockdown than many countries and a more generous furlough scheme. As this column kept lamenting at the time, there was bound to be a reckoning.
So why now? Why did the long-term decline in sterling (and rise in the cost of gilts) accelerate at the very moment when Osbrownism was being abandoned? After all, this budget was intended precisely to undo the root causes of that decline, halting the engorgement of the state and removing barriers to enterprise.
Many market analysts struggled to explain it, pointing out that most of the budget had been flagged up in advance. Deutsche Bank’s team made an especially telling observation: “Perhaps it was the unabashed revival of trickle-down economics that had markets a little aghast.”
That obviously false statement accurately sums up the mood. I can’t be bothered to explain all over again why trickle-down is a myth, an absurd Leftist caricature of what Rightists are supposed to believe, a conspiracy theory as outlandish, after its fashion, as QAnon. I have written that rebuttal many times over the past 15 years, and am delighted that ConHome’s William Atkinson is taking the flame from my weary hand. He can now pump bullet after bullet into the zombie idea of trickle-down, the lie that won’t die.
But the fact that no one is proposing trickle-down doesn’t stop people thinking that someone is. The fiscal statement has been so widely mischaracterised that I suspect several voters genuinely now believe that the Tories are trying to boost the economy by making the rich better off.
What the sterling sell-off may have reflected – and what those Deutsche Bank analysts may clumsily have been suggesting – is the belief that this budget has made a Labour victory more likely.
For, although the economics were sound, the politics were always going to be difficult. Few voters get the counterintuitive logic of the Laffer Curve. A government might earn more revenue from a 40p than a 45p tax rate; but it will lose votes from those who refuse to believe it. A government might enlarge the economy, and so have more to spend on public services, if it scraps the EU’s limit on bankers’ bonuses. But the voters who make a logical assessment of their interest will be outnumbered by those want something – anything – done to make bankers’ lives harder.
In other words (and I am aware of how much this runs against the current narrative) what we have seen since Friday is partly a market adjustment to the increased probability that Sir Keir Starmer will win in 2024 or 2025 – leading to higher taxes, higher spending, and a weaker economy.
That and one other thing. The sell-off also reflected a measure of surprise that interest rates were not rising faster. During the leadership election, Liz Truss made no secret of her view that the Bank of England had kept interest rates too low for too long. She made that argument – a fairly orthodox one among conservatives – in several interviews, including with this website.
Given that the Bank of England had just raised rates by a smaller amount than expected, the markets were looking to see what the Chancellor of the Exchequer would say. Might he talk of a new mandate for the Bank, or at least express a public view of where interest rates should be? In the event, he did not. On the contrary, he spoke of the independence of the Bank of England being “sacrosanct”.
Now I happen to agree with the Prime Minister about interest rates. They have indeed been too low for too long. You might take a different view, and it is striking that several broadcasters are warming us up with talk of how much more debt people have taken on now than when interest rates were at a historically normal level.
You might share their implied conclusion, namely that our monetary policy should be dictated by the needs of those who mortgaged themselves to the eyeballs in the belief that near-zero interest rates would carry on forever. Fine. But don’t pretend that higher interest rates represent a failure of Trussonomics. They are precisely what the premier (and her chancellor) want to happen.
So much commentary over the past five days has been driven by motivated reasoning. Some pundits don’t like Truss, others have never forgiven the Tories for Brexit, yet others are horrified by the idea that growth, rather than equality, should be the Government’s priority. Fair enough. But let’s be clear-headed about what is happening.
The prospects of lower interest rates would, for obvious reasons, mean a weaker pound. The prospect of a high-spending Labour administration likewise. But a tax cut designed specifically to get the economy moving again?
The chancellor’s best option now is to prove that he means what he says about all the supply-side reforms he flagged up last week: more housing, easier fracking, cheaper childcare, lighter regulation and so on. As his words turn into policy, the economy will grow. But he has to show that he is serious, that he cares more about long-term prosperity than about short-term headlines.
That is why it would be bad politics, as well as terrible economics, to back down.