Kami-Kwasi Economics: What The Mini-Budget Means For You
Two years of Boris Johnson at the helm has led to a total stagnation in all areas of British politics. I have totally forgotten what it was like for a government to actually create interesting policy and debate that in Parliament. British politics has been marred by scandal and corruption, and we just watch on like it’s a reality television show.
I’m no fan of the current regime, most of them are incumbents from a previous one, but I am forcing myself to be optimistic about the possibility of some actual policy to consider. Finally, I thought, we would have something to debate and discuss.
After today’s announcements, however, scandals suddenly seem a lot more appealing.
Liz Truss and her chancellor Kwasi Kwarteng, authors of the famous book “Britannia Unchained” that described Britons as among the “worst idlers in the world”, laid out their arsenal in a mini growth statement. The cost-of-living crisis brought on by the effects of Brexit and exacerbated by the war in Ukraine is quickly getting out of control, and some fiscal measures were necessary after a couple of years of nothingness. So, how do todays pronouncements look?
In short, these changes are a large tax cut for the rich and for corporations, and a disproportionately small, inconsequential tax cut for the country’s poorest. Historically the government would have sold such measures by claiming it would stimulate the economy, a form of trickle-down economics, though I’m not sure they’re even going to bother convincing anybody this time. This is simply what they’re going to do, and there’s nothing the rest of us can do about it.
In short, trickle-down economics is a theory that suggests providing more cash to the wealthy and to businesses will lead to greater spending on staff and investments. With staff having more cash in their pockets they can spend this money, which will stimulate the economy in a cycle and the benefits will eventually working their way down to the bottom. The problem is, if you give corporations more money by way of a tax cut, how can you guarantee how they will spend it, or even if they will spend it at all?
For Ordinary People
The Energy Price Guarantee caps energy bills at £2,500 for the average home. Well, sort of. The way these caps work is that it places a cap on the unit cost of energy, and not your total bill, and so this figure is an estimation. There are many other measures they could introduce to prevent corporations from hoarding profits at the expense of the general public, but honestly it’s better than nothing which is what many were expecting.
The basic rate of tax will fall next April from 20% to 19%. This was already due to happen and was announced previously by Rishi Sunak – all Kwarteng has done is bring it forward by one year. It will save someone earning £30,000 a year about £175 a year in income tax.
National Insurance will also fall. Once again, this is repeal of a policy introduced by Rishi Sunak to aide economic recovery from the increased spending and stagnated growth following the various COVID-19 lockdowns. National Insurance will fall by the 1.25% it was increased a few months ago, and will save someone earning £30,000 £200-300 a year. Both of these measures will save high earners tax too.
There has been a significant reform to Stamp Duty. Stamp Duty Land Tax is paid when purchasing a property in addition to your deposit, mortgage etc., and although it seems complicated there are plenty of free calculators you can find online. This is disingenuously being sold as a benefit for first time buyers, when in reality first time buyers had a decent concession on SDLT anyway.
Until now, first time buyers did not have to pay SDLT on properties worth up to £300,000, and then a reduced rate of 5% on amounts above this. The £300,000 limit is being increased to £425,000, which I’ll admit is a genuine saving for first time buyers. However, the SDLT saving on a £350,000 property is only £2,500 as a result of this change. There is no first time buyer out there unable to buy a home because the Stamp Duty is too high, and this policy is one of the last on the list you’d select if your supposed motivation is to get young first time buyers on the property ladder.
For Businesses & The Rich
Rishi Sunak proposed a large Corporation Tax rise which Kwarteng has cancelled. Corporation Tax will remain at 19%, with the justification that more profits being retained will increase investment and boost the economy. Interestingly, while our Corporation Tax rate is one of the lowest of all the G7 nations, our business investment is also the lowest. That gives you an idea of where the tax savings will go, because it certainly won’t be reinvested.
The additional rate of tax will be abolished from April next year. Until now, income above £150,000 was taxed at 45%, but with this rate band being abolished all income above the basic rate band will be taxed at 40%. This is effectively a 5% tax cut for high earners.
Some may try to convince you that we are returning to the rate of tax when Labour were last in power which is true. A 50% additional rate band was introduced in 2012 and then cut to 45% in 2013, but that was during a recession following a global economic crisis. The last time we saw a 40% additional rate of tax was off the back of 15 years of steady economic growth.
The cap on bankers’ bonuses will be removed. Currently bankers’ bonuses are capped at a measly 100% of their salary, but this will be abolished altogether. Kwarteng may try to say this is to encourage bankers to come to the UK, but in reality with Brexit “over” our financial sector is the last vestige of international prestige that we have left. It is mostly for global PR, but it isn’t going to work how Kwarteng hopes. At least it’ll make some bankers very rich in the process.
The changes to Stamp Duty will also affect people buying second homes and investment properties as the nil band of £125,000 has been doubled to £250,000. We’ve already seen the benefit for first time buyers is minimal, and since property investors are a major cause of inflated property prices in the UK anything that encourages them to increase their business will be bad news for first time buyers.
The above is pretty damning and is made only worse when you realise that these policy changes are not based on forecasts from the Office for Budget Responsibility (“OBR”), despite the option being available to Kwarteng. The only reasonable conclusion that you can draw from this is that the government know these measures will not lead to the economic growth the chancellor is after, because it isn’t designed to do that. For all the talk about magic money trees, they are cutting taxes to line the pockets of the rich and borrowing more to plug the gap. Have a guess at who you think pays for this debt in the long run…
The measures announced today simply do not align with the given objective of tackling the cost of living crisis and generating economic growth. It is like taking a bank loan to buy lottery tickets with the hope of winning big. They are gambling, hoping that these measures create growth, but we know from experience that trickle-down economics doesn’t work. They are addicts but it’s our lives that they gamble with.
There isn’t just an arbitrary cost of living crisis sprouting from nothing. This is the result of Brexit, a now irrevocable economic calamity that was always headed in this direction, the consequences of increased spending and low growth during the pandemic, the impact of the war in Ukraine, and all on a backdrop of 12 years of Tory austerity and incompetence. The Conservative Party are the cost-of-living crisis.