“I can’t be broke; I still have plenty of cheques.”—Eric Sykes in BBC’s Sykes,1972
Citing events of a half-century go is not as irrelevant to Friday’s “mini” budget as you might think. In a three-hour session in parliament when Kwasi Kwarteng presented and defended his £45 billion tax relief. He pitched it as a radical scheme for growth, as if Truss’ new government were blaming years of 1% (i.e. sluggish) growth under the Tories on someone else. This surprised many Tory members behind him, as they had all loyally voted through measures he was now scrapping.
His proposals gladdened the hearts of arch-Tories like Ian Duncan Smith and John Redwood by scrapping:
- 1.25% rise in NIC contributions
- proposed rise of corporation tax to 25%
- 100% ceiling on bankers’ bonuses
- 45% top income tax rate
Adding in the 1% drop in the lowest tax band to 19%, doubling of stamp duty threshold (in England) to £250k, plus other measures constitute a bold move to bump-start growth or innumeracy on a grand scale. A quick analysis, done by the IFS seems to point to the latter. It predicts:
- Half of the £45 billion will benefit the top 5% of earners
- Those earning more than £150,000 will pay less tax
- Those earning less than £150,000 will pay more tax
- Those earning £1 million will pay £55,000 less tax
- Those earning £20,000 will pay £150 less, but this will be swamped by inflation
According to Kwarteng, this will boost UK growth from 1% to at least 2.5%, whereby all—and not just the rich— will prosper from sharing a bigger cake. Contrary to normal practice, none of this had been passed through the OBR (Office fir Budget Responsibility) as a sanity check. He claims it may be radical, but no gamble.
There is serious dissent with this view. For a start, it reeks of “trickle-down” economics, whereby, as the rich get richer, they spread it around and everyone benefits thereby. The problem? It’s been tried; each time, the rich and the right wing colluded to foist it on the public, inequality got sharply worse. History shows it doesn’t work.
“Those who do not learn from history are condemned to repeat it.”—George Santayana
Lesson 1: Anthony Barber
In March 1972, Heath’s Chancellor Anthony Barber presented his “Dash for Growth” tax-cutting budget. At the time, a pint of milk cost 6p and a gallon (4.5 litres) of petrol was 35p. Within months, he was forced to float the pound, leading to a sharp decrease in its value and huge inflationary pressure on the economy, which failed to grow in the way his tax-cutting measures had been intended to stimulate.
I do not believe that a stimulus to demand of the order I propose will be inimical to the fight against inflation. I see no reason why the present boom should either bust or have to be busted.”—Anthony Barber on his 1972 Budget.
After industrial unrest,Ted Heath called a general election early in 1974 and Barber lost his job as chancellor as Harold Wilson was returned to office with a minority Labour government. This ran into massively unruly unions. Together with oil price shocks, this led to three-day weeks, inflation reached 24%. Britain became described as “The Sick Man of Europe”.
“Anthony Barber’s appointment as Chancellor was the first time I realised Ted Heath had a sense of humour.”—Harold Wilson, 1970
Lesson 2: Ronald Reagan
“The idea behind Reaganomics is that a rising tide raises all yachts.”—Walter Mondale
When he became President in 1980, Ronald Reagan introduced a similar package he called “free market economics”, but which has since been called “Reaganomics”, “supply side” or “trickledown” economics. Like Barber and Kwarteng,, it involved reducing income tax and capital gains tax, reducing government regulation. But, unlike them, it included balancing the federal budget, slowing the growth of government spending and tightening money supply to reduce inflation.
This did create affluence, largely driven by booms in semiconductors, oil, software, arms and global corporations like Macdonald’s. But the affluence went mainly to the rich; inequality grew as “Joe Sixpack”, who had pulled down $25 an hour in Motown found themselves doing menial work to survive as US manufacturing slumped in the face of imports. Affluence in Sun Belt cities like Los Angeles and Phoenix contrasted with social decline in Rust Belt cities like Detroit, Cleveland and Pittsburgh.
Lesson 3: Donald Trump
Nothing daunted, Donald Trump played to his Republican backers in 2016 by trying the same gambit. His 2017 Tax Cuts and Jobs Act was the largest overhaul of the tax code since then. It created a single corporate tax rate of 21% and gave individuals an average tax cut of $1,200.
“At the time, economists did not think Tax Cuts and Jobs Ac would pay for itself, it only paid about one fifth..”—Eric Ohrn, Asst. Prof of Economics, Grinnell College
For the wealthy, banks, and other corporations, the tax reform package was considered a lopsided victory given its significant and permanent tax cuts to corporate profits, investment income, estate tax, and more. By 2019, less wealthy found their tax bills higher and refunds smaller. The overhaul was forecast to raise the federal deficit by $1.9 trillion. The highest earners would benefit most from the law, while the lowest earners would pay more in taxes. Under Trump, the U.S. national debt increased by 39%, reaching $27.75 trillion by the end of his term,
Is Kwasi Kwarteng Lesson 4?
None of these lessons from history are identical to what is now proposed for Britain. It is too early to tell whether Kwarteng’s radical plan is as much of a backward step as they indicate. But some elements of it suggest the result might even be worse:
- Trump’s plan was the only one to propose borrowing to cover lost tax revenues
- None of the above plans faced the level of public spending on benefits, health, education and defence already committed to by Truss’ government
- None of the above plans faced a rejection by financial markets that happened to Kwarteng’s plans the day they were announced.
This reeks of a desperation similar to Putin’s. It’s economics, Jim—but not as we know it.