Harry Thompson, the IWA’s Economic Policy Lead, responds to the UK Government’s mini-budget and subsequent events.
In many ways the economic and political fallout from the UK Government’s ‘mini-budget’ speak for themselves. This week the pound fell to a record low of $1.0327 before rallying slightly – although it continues to sit at near-record lows.
This is the latest in a long line of devaluations of our currency against the dollar, which had a value of around $2 prior to the 2008 financial crisis when it fell to around $1.6, where it sat until the UK voted to withdraw from the European Union, at which time it fell to a range of around $1.20 – $1.30. It remains to be seen whether the current plummet to around $1.08 marks another semi-permanent devaluation of the currency, or a temporary reaction by markets to the new UK Government’s economic policy. The degrading value of the pound is a complex matter that will hinder some and help others but it perfectly matches the degrading nature of the UK economy’s ability to deliver for people living here in Wales over recent years.
It is unsurprising that a low-income country such as Wales would gain less from tax cuts focused on higher earners than areas such as London and the South East of England would, but it will have a huge material impact.
Economic policy, of course, should be judged primarily on its impact on people’s lives rather than on the reaction of financial markets, with recognition that the latter does have an impact on the former. The measures announced in the mini-budget are underpinned by the wrong priorities, a fundamental misunderstanding of the stimulus the economies of the four nations of the UK require, and a seeming lack of priority for directly or structurally tackling the cost-of-living crisis.
The Truss administration has signalled that it is to partially pick up the playbook of the Institute of Economic Affairs and enact the opening chapter of a flatter, lower taxation policy. The second chapter would usually see a corresponding withdrawal of public services and the state from people’s lives, but for the time being this will instead be addressed with increased UK Government borrowing.
As it stands, we have seen a cut in the basic rate of income tax from 20p in the pound to 19p from April 2023, the abolition of the 45p threshold for earnings over £150,000 from the same date, a reversal in the National Insurance rise, and a cancellation of the planned UK-wide rise in corporation tax from 19% to 25%. This represents the largest cut in taxation in 50 years, and is a huge bung to those on the highest salaries. The Resolution Foundation found that those earning over £200,000 a year would gain £5,220 a year, whereas those on £20,000 would gain just £157.
This has a geographic dimension to it, too. The Resolution Foundation also found that those in the South East or London would gain an average of £1,600 a year, whereas those in Wales would gain an average of £500 a year. It is unsurprising that a low-income country such as Wales would gain less from tax cuts focused on higher earners than areas such as London and the South East of England would, but it will have a huge material impact.
The UK state has backed away from direct problem-solving, preferring instead to leave people’s lives to be regulated by markets
The UK economy is currently stuck in a tug of war between fiscal and monetary policy. The UK Government is injecting huge sums into the economy at a time of high inflation in an expressed attempt to generate growth, whilst the Bank of England is in the process of ramping up interest rates in an attempt to depress demand.
This confused situation would be concerning enough in ordinary circumstances, but the circumstances now are stranger still. The austerity era saw the UK Government abdicate responsibility for taking the lead on the precursors for long-term growth. It ceded to others world-leading transport and connected communities, getting the best out of talents from all backgrounds, and stealing a march on other nations by reaping the economic benefits of a zero carbon transition. These were missed opportunities. Opportunities that the IWA has in years past encouraged both Welsh and UK Governments to seize within their respective powers. Ultimately though, when it comes to powers, it is only the UK Government that has the fiscal powers to enable truly transformational change. If these opportunities had been taken, we would be weathering the cost-of-living crisis sparked in part by Russia’s invasion of Ukraine and spiralling fossil fuel costs better.
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Instead, the UK state has backed away from direct problem-solving, preferring instead to leave people’s lives to be regulated by markets. We have seen a distinct move towards fewer and lower-quality public services, with stagnant pay rises seeing people’s living standards for many years stand still, and recently, begin to fall back.
And it is in these circumstances that the ‘mini-budget’ stands. The slogans of ‘Take Back Control’ and to a lesser extent ‘Levelling Up’ had a resonance in large parts of Wales and those areas of the UK that resemble Wales. This was in part because these areas can often look like the government has lost control or abandoned them. High streets and community cohesion are diminishing as the free market discards them and government makes the active choice to step away.
The mini-budget has had a terrible initial impact on the financial markets and is already intruding on people’s lives, with first-time buyers seeing their mortgage offers withdrawn as banks reel from the impact of panicking markets.
These areas desperately need government investment in the things that were lost in the austerity era such as bus routes, community centres, and hubs on their high street such as libraries. And it is important to look forward as well as back – new ideas such as government-backed remote working hubs on high streets can also help to rejuvenate people’s places. If tax cuts for business must be pursued, we must remember that corporation tax is paid by all limited companies in the United Kingdom and is levied on profits. Small businesses that sustain high streets such as hospitality are often more concerned with business rates or the NI contributions that can act as a disincentive to employing staff on full-time hours. There is a strong case for a more targeted, progressive system of business taxation that rewards social value and ensures those with the deepest pockets contribute the most.
The mini-budget has had a terrible initial impact on the financial markets and is already intruding on people’s lives, with first-time buyers seeing their mortgage offers withdrawn as banks reel from the impact of panicking markets. As we publish this the situation continues to spiral.
But perhaps the greatest regret is the opportunity cost of this investment. The IFS estimates that the Chancellor’s tax cuts will cost £45bn a year, an eye-watering amount that, if invested wisely, could truly ‘level up’ Wales and other nations of the UK in a tangible, visible manner. This could be done in the ways listed above but also by investing in the things that we know do actually spur long-term increased productivity and economic growth, such as world-beating transport links, a highly skilled population, combating inequality to reward talent over privilege, encouraging all constituent nations of the UK to be hubs of cutting-edge technology, research and development, and investing in a green Welsh and UK manufacturing sector tailored to the 21st Century with well-paid jobs in which workers’ rights are upheld.
An economy of low pay, low rights and low regulation is not a recipe for an economy that delivers for people.
Instead, the UK Government has chosen to row back on long-term stability for the NHS and other public services via the NI rise, to pursue an expensive and badly-targeted cut in the basic rate of income tax, and a wholly unjustifiable tax cut for those on the highest incomes at a time when many people in Wales are struggling to make ends meet.
The UK Government is in an unenviable position of managing an economy with high inflation and low growth. Ultimately, though, this is an economy of its own making through years of under-investment in the things that matter. An economy of low pay, low rights and low regulation is not a recipe for an economy that delivers for people. This mini-budget picks up the pace along a track the UK is already walking down.
The annual £45bn cost of these tax cuts could change the course of the country and many people’s lives. The UK Government should reconsider its direction and seek to prioritise investment in a strong, green, and successful economy for the United Kingdom rather than tax cuts that disproportionately favour the wealthiest.