*Commentary – I wrote this days after the mini-budget was delivered by Kwarteng. The article is rooted in what I thought was the ideology behind the budget, an ideology I still agree with despite the adverse market reaction that followed. Essentially, I took a broad view of the budget’s purpose at the time it was delivered.

“Labour believes in wealth creation!”  declares Rachel Reeves; the shadow chancellor of the exchequer (Finance minister of the opposition party) in the middle of her speech which attacked the UK government’s proposals in tackling the country’s cost-of-living crisis after it was unveiled in a mini-budget at the house of commons on Friday, the 23rd. Naturally, the opposite bench, which was full of conservatives whose political knives had recently cut short the regime of Boris Johnson erupted in raucous laughter mocking her declaration.

“You can’t tax your way to growth…” retorts the Chancellor; Kwasi Kwarteng with loud cheers in support from his fellow conservatives and the ensuing episode consisted of British MPs yelling unintelligibly at each other, typifying business as usual on a Friday afternoon at Britain’s parliament. In so many ways, this scene illustrates a refreshing return to ideological politics in Britain as the race to the 2025 general elections draws near. The dominant subject at the moment is Britain’s cost-of-living crisis, marked by rising energy bills and there are differing economic ideologies peddled by the two largest political parties on how best to solve this problem.

The Labour party believes the solution to solving the problem of rising energy bills is to freeze the cost of energy at the current price cap for six months and after that wait to see what happens. The energy price cap set by government regulator; Ofgem, limits the amount energy suppliers can currently charge customers at an average rate of £1,971. This cap has been projected by Cornwall insight; a forecasting group to rise to £3549 by October and ultimately, £5386 by April 2023.  Labour, characteristically, has said it plans to pay for its energy price cap by imposing another windfall tax on the “excess” profits of oil and gas companies. The previous conservative Chancellor; Rishi Sunak had caved in to pressure from opposition parties and had imposed the first windfall tax on oil companies in May.  In a classic taking from the rich to help the poor narrative, some Labour party campaigners have judged it “immoral” that oil companies are currently reining in excess money because of the war in Ukraine while some people are struggling to heat their homes.

However, the plan of the new conservative government is to also cap the cost of energy, but at £2500 for two years. The costly state intervention will protect rising energy costs for both households and businesses which will most likely be funded by more government borrowing. In an echo of his position while he was Business secretary, the current Chancellor Kwasi Kwarteng has declined to impose a windfall tax on oil companies, mandating them instead to re-invest their excess profits in the British economy.  Beyond this windfall tax argument however, the starkly disparate positions of Britain’s two largest political parties on the best way to fund the cost of capping energy feeds into a larger debate about the economic ideology that should determine the direction of the British economy after Brexit. In a clear break from the Johnsonian era where the personality of the prime minister overshadowed even his most progressive policies, the new government’s opposition to a windfall tax as well as the tax cuts outlined in Friday’s mini-budget is guided by the politico-economic philosophy of Britain’s new prime minister and her Chancellor, which is: The state needs to ensure economic growth by encouraging more private sector investment through lower taxes and less regulation.

This can be said to be the overall theme behind the mini-budget which ensured most of the previous tax rises enacted by Boris Johnson has been reversed, marking a radical return to the socio-political legacy of Margaret Thatcher whose political shadow still looms large over the conservative party. Unlike the tired arguments being peddled by sanctimonious left-wingers that Kwarteng’s tax cuts overwhelmingly benefit the rich at the expense of poorer people despite that the government will soon be freezing the cost of energy for the most vulnerable households, these tax cuts all put together are designed to send a resounding message to investors that Britain is open to business and focused on long-term economic growth. For example, Corporation tax that was initially scheduled to rise from 19% to 25% has been reversed. In addition, the previous cap on banker’s bonuses which was enacted under EU law to restrict the remuneration of London’s bankers has been rightly abolished. More importantly, specific tax free investment zones in an echo of Johnson’s “levelling up” agenda will be set up around the country to encourage first-time investment in under-invested areas in the UK.

Another particularly interesting tax cut which clearly illustrates the dividing line between the ideologies of the two parties is the 45% additional rate of income tax paid only by people that earn above 150,000 pounds per year. The government has pledged to abolish this particular tax by April next year, stating instead that earners in this tax bracket will simply pay the normal 40% rate that applies to all higher earners. However, in an interview with BBC’s Laura kuenssberg on Sunday, the Labour leader; Sir Keir Starmer has said he would reverse this policy, rehashing the same old socialist argument that the rich shouldn’t be getting richer while some people are struggling. But in the same interview, the chancellor Kwasi Kwarteng sensibly justified the reason for abolishing the additional tax rate by stating that if the government gives the impression that aspiring to earn more either by increasing productivity through innovation or even simply taking on more hours will result in higher taxes, why will people feel the need to work? And if people are reluctant to be productive, how will the economy grow in the longer term?

In essence, the clear message from the Chancellor’s mini-budget and his opposition to the windfall tax is that the current Government rewards enterprise so people can feel comfortable aspiring to higher standards of living through being productive knowing the government is not itching to tax their efforts away. Government policies should ensure a balancing act by providing for genuinely vulnerable people but at the same time signify to working class innovators and big businesses that the state will not stand in the way and determine what would count as “excess” profit-making.  This is why it is important that Kwarteng’s tax cuts and his position on the windfall tax should not just be seen in monetary value, because of the temporary decline of revenue it might cost the government but rather in the signal it sends to businesses and individuals about the government’s desire for economic growth.  

There are, however, some pitfalls to the avalanche of tax cuts offered by Kwarteng and this has been pointed out expertly by Paul Johnson, the director of the institute of fiscal studies, who has criticized the gamble on growth associated with Kwarteng’s cuts.  “Mr Kwarteng has showed himself willing to gamble with fiscal sustainability, in order to push through these huge tax cuts…” He asserts, summarizing the risks that could result from injecting spurious demand into a high-inflation economy. Objectively, this criticism is well-founded and given that Mr Kwarteng has refused as of this time to publish the government’s plan for fiscal sustainability, the worries that his tax cuts might further fuel inflation leading to higher interest rates which would ultimately make Government borrowing more expensive and unsustainable are legitimate.

Despite this, it is important to understand the current economic context in order to understand why the radical direction of the new government is sensible. Economic growth in the UK before the pandemic averaged at 1.8% which is almost a percentage lower than two decades ago. In addition, UK labour productivity growth has slowed from roughly 2% in the decade before 2008 to 0.4% in the present decade. In a situation whereby the economy is stagnating and productivity is declining, raising taxes like the corporation tax which serves as a deterrent to more private-sector investment is a recipe for more economic decline.  This is why ensuring growth through targeted policies that stimulate productivity and also provides the right eco-system for start-ups, big businesses and generally the working class to thrive is the right call as this would expand the overall size of the economy and strengthen the government’s fiscal position.

Kwasi Kwarteng has said he wants to boost the UK’s GDP to 2.5% in the medium term, after the office for national statistics estimated Britain’s GDP to have fallen by 0.1% from April to June, 2022. One of the things he could do to achieve this is to boost productivity by plugging up shortages in the workforce and there are indications the chancellor has started down this path. With Job vacancies rising to over one million in the UK and 5.5 million people claiming some form of work benefit, the Chancellor has, according to a report by the guardian started formulating plans that will ensure benefit claimants working up to fifteen hours a week are taking new steps to increase their earnings or face their benefits being reduced. This is another step in the right direction for long-term economic growth.

Yet, the chancellor’s ‘dash for growth’, while well-intentioned is still subjected to unpredictable market forces and a lot of political headwinds might still lead to a normally progressive economic policy having the opposite effect.  Whatever happens in the long run, the overall ideology behind the Truss-kwarteng mini-budget is the right one and although it might seem like a high-risk gamble, Britain’s conservative party and its new leaders after 12 years in power cannot risk repeating past policies and looking like a version of the old order when the general election is less than three years away.