Truss and Kwarteng have made no effort to ensure the public finance numbers add up

As  the markets give the thumbs down with the pound plunging and the costs of government borrowing increasing……the Tories really look to be on course to crash the economy – Owl

Mini-Budget response –  Institute for Fiscal Studies

Paul Johnson, IFS Director, said

“Today, the Chancellor announced the biggest package of tax cuts in 50 years without even a semblance of an effort to make the public finance numbers add up. Instead, the plan seems to be to borrow large sums at increasingly expensive rates, put government debt on an unsustainable rising path, and hope that we get better growth. This marks such a dramatic change in the direction of economic policy-making that some of the longer-serving cabinet ministers might be worried about getting whiplash.

Mr Kwarteng has shown himself willing to gamble with fiscal sustainability in order to push through these huge tax cuts. He is willing to shrug off the risks of inflation, and to invite significantly higher interest rates. And he has avoided scrutiny by presenting a Budget in all but name without accompanying forecasts from the Office for Budget Responsibility.

Injecting demand into this high-inflation economy leaves the government pulling in the exact opposite direction to the Bank of England, who are likely to raise rates in response. Early signs are that the markets – who will have to lend the money required to plug the gap in the government’s fiscal plans – aren’t impressed. This is worrying. Government borrowing is set on an upward path. It will reach its third-highest peak since the war, and remain at well over £100 billion, even once the energy support package is withdrawn.

And we heard nothing on public spending. It seems almost inconceivable that plans made last year, when inflation was expected to peak around 3%, will not need topping up at some point, unless the government is willing to allow a (further) deterioration in the range and quality of public services. Presumably this government would borrow for that also. 

Mr Kwarteng is not just gambling on a new strategy, he is betting the house.”

Go to ifs.org.uk to read the full article which includes penetrating analyses of each policy announced. Here are a couple of examples:

Income tax and National Insurance contributions

…. Only those with incomes over at least £155,000 will be net beneficiaries. They gain from the abolition of the additional rate, and are unaffected by freezing the personal allowance because their incomes are too high to be eligible for one anyway. This is quite a different picture from that before the mini-Budget, which implied larger tax rises across the board, but especially so for higher earners.

Taken together, today’s measures undo much of the tax rises introduced by Johnson and Sunak, and undo all of them for the highest-income households. The losses for middle- and higher-income households from previously introduced policies will be roughly halved by today’s measures. The richest tenth of households, who were set to lose around £3,500 a year (3%) on average in 2025-26 under Johnson and Sunak’s plans, will now gain around £700 a year (1%) on average.

Investment Zones

The government intends to create new Investment Zones getting special treatment for tax, regulation and local governance. The full details, and therefore the cost, have not yet been confirmed.

Tax sites within the new Investment Zones will offer a raft of temporary business tax reliefs similar to those available in Freeports, but even more generous and for ten years rather than five. These tax breaks are likely to increase economic activity in these areas, but some of that would otherwise have happened elsewhere in the UK.

This raises the question of why it is better to have lower taxes in some parts of the country than others – encouraging people and businesses to move to the favoured areas – rather than spending the same money on (smaller) tax cuts spread evenly across the country: for example, whether it is intended to help ‘level up’ deprived areas and, if so, whether the areas and policies chosen are appropriate for that objective.

Since the tax breaks are temporary, another question is how much businesses will find it worth making long-term investments that will tie them into the area for longer than that – and, correspondingly, how much the economic benefits to favoured areas will persist after the tax breaks expire.

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