Reading time 7 minutes
On Friday Kwasi Kwarteng will present his first “fiscal event” (effectively a mini budget) to Parliament. Perhaps no newly appointed Chancellor has ever faced such a combination of challenges in his first month in post. He will be expected to fix the urgent problems which are driving large numbers of people towards poverty. But we will also see signals of how, and whether, this government proposes to tackle some underlying issues.
Long and short term issues
The sixth richest country in the world faces economic crisis, with rising poverty, a falling pound, soaring inflation and industrial unrest, among others. This is the product of a combination of long standing issues like underinvestment and low productivity; medium term ones like the impact of Brexit, and a decade of austerity; and short term ones like the impact on food and energy supplies of climate change and Russia’s invasion of Ukraine. Will Kwarteng’s plans begin to reverse these, or dig us in deeper?
A government missing in action
Despite the crises, our government has been asleep. Between Boris Johnson’s resignation on 7 July, and the return after the Party conference season on 17 October, Parliament will have sat for six days, two of them devoted entirely to tributes to the Queen. So for three months, as an unprecedented crisis unfolds, government has done little, and there has been almost no scope for Parliamentary debate and scrutiny.
So here are six questions to consider when Kwarteng sits down in the Commons on Friday.
1. Will it make life affordable for everyone?
Prices are rising rapidly. For two decades inflation has been well below 4%, but it has now passed 9% and is still rising. Furthermore, it is higher for the basic goods and services which the poorest spend most of their money on. Although most of this is the product of international pressures, the Bank of England’s response, to raise interest rates, will contribute too, by pushing up the cost of credit and mortgages.
Consumer confidence and optimism about family finances have fallen to their lowest since 2013. Real earnings have been static for a decade, while inflation is draining peoples’ savings, making growing numbers of employed people dependent on food banks and a benefit system designed for quite different circumstances.
The most immediate problem is energy prices, which are rising dramatically because of Russia’s decision to cut off gas supplies to Europe. However, government policies in most European countries have kept the impact on households and businesses lower than in the UK. Although the government plans to borrow money to cap the unit price of electricity to households, domestic bills have doubled since August 2021, and 6.7 million people are already in fuel poverty. And the repayments on that debt which, at £8.3 million in August, is already the highest on record, will fall on consumers and taxpayers over future years.
Businesses face the same problem. Many small firms and heavy energy users are facing energy bills quadrupling. In the last year business insolvencies rose by 72%, with over 2000 firms closing in August alone. As they lay off their staff, every one of these adds to the total of people approaching or forced into destitution.
On top of this, food price inflation is currently running at 13% pa. driven by the Ukraine war, which has cut off a major source of grain and oil, and by global climate change.
Finally, the government plans to reduce taxes, but reductions in income tax and national insurance have no benefit for the poorest, who do not pay them, and give disproportionate benefits to the richest.
2. Will it make our public services sustainable?
All public services have suffered in the last decade from ideologically driven budget cuts. Even where there have been some notional increases, as in the NHS, they have not kept pace with inflation. The NHS is currently short of 12,000 doctors and 50,000 nurses. Some hospitals are crumbling: in Kings Lynn the hospital has buckets to catch leaking rainwater. Elsewhere, the system is blocked by the lack of social care: Norfolk and Norwich hospital has 200 beds occupied by people medically fit for discharge but unable to leave because there are no social care places.
Despite this, Liz Truss has said that she will cancel the planned increase in National Insurance, which was designed to provide funds to help the NHS recover from Covid, and help with the crisis in social care. Is the social care plan to be abandoned, or will it now be funded by further borrowing?
Public services are also losing staff at an alarming rate. Overall levels of employment in the UK have never been higher, and employers are struggling to fill vacancies. Private sector employers are responding by raising wages, currently at an annual rate of 5.9%. This option is not open to public sector employers, where budgets are set by central government. Here, wage rises are currently below 2%, and struggling public sector workers are leaving for better pay in the private sector. There are already critical labour shortages in health, education, and the justice system. In social care, where most provision is purchased by government from private sector organisations, small firms are squeezed, and some are closing, increasing pressure on the NHS.
3. Will it make the economy more productive?
Britain has had low levels of productivity for many years, and since 2007 it has been the second lowest among the G7 countries. It now takes the average British worker 40 hours to produce what the average G7 worker produces in 35.
This is a product of low investment in equipment, and low investment in the skills of the workforce. Both reflect a lack of confidence among investors. Why put money into an economy which may be failing?
Low investment in skills is a particular problem. British employers and governments have traditionally underinvested in the skills of adult workers, often preferring to import skilled workers from other countries. Government has cut expenditure on vocational education dramatically, and employers have matched this. Employers pay an apprenticeship levy, which they can reclaim if they spend money on training. In the last three years, £3 billion was returned to the Treasury, because employers didn’t spend it.
4. Will it improve trade?
The government hopes that stimulating economic growth will revive the economy, and generate the money to tackle all these problems. A key element of this must be international trade. But this requires a stable currency, investor confidence and minimising regulatory barriers, many of which are the result of Brexit changes. The government inherits strained relations with France and Ireland, our nearest neighbours and trade partners. The government seems determined to undermine the Northern Ireland Protocol, which has made the Province the most economically successful part of the UK.
The currency is not stable. At £1.13 to the dollar, Sterling is back where it was when we fell out of the European Exchange Rate Mechanism on “Black Wednesday” 30 years ago, and some are predicting a sterling crisis. A weak currency makes imports, including many basic foods, more expensive, adding to domestic inflation. Weak sterling should be good for exports, but with a shortage of investment and labour, and growing trade regulations, it is doubtful whether British firms are able to take advantage of this.
5. Will tax changes benefit those who need it most?
This government believes in low taxes. They believe that financial incentives, and removing regulations, encourage investors and entrepreneurs to become more active, to innovate and expand their businesses, raising productivity and earnings. The theory is that the resulting wealth will “trickle down” through the economy, ultimately benefiting all. So they are keen to reduce taxes on high earners and businesses. They also believe that public spending diverts resources and workers away from these “productive” sectors into unproductive services and bureaucracy. However, a side effect of this has been a steady and rapid erosion of the free public services, which disproportionately benefit the poorest, with the selling off of parks, libraries and leisure services.
The evidence of the last decade suggests that, far from raising wealth for everyone, these “trickle down” policies increase the gap between the rich and poor. In the late 1970s, when this theory became broadly adopted, the top 0.1 % of earners earned 13 times the average income; by 2020 the proportion had risen to over 70 times, the highest since 1936. The 0.1% are precisely the people who stand to benefit most from low taxes and low regulation of their finances.
6. Will there be proper (or any) scrutiny?
The Office of Budget Responsibility was created by the Coalition government in 2010 to provide an independent public assessment of government spending plans. The Prime Minister has made it clear that they will not be asked to comment on the current round of plans. Although there will be a plethora of commentaries from think tanks and research bodies, none will carry the same authority.
Prioritising and direction
No Chancellor can solve all problems in the first month (or ever). Some issues, especially the energy and inflation crises, must be at the top of the list. But his first “fiscal event” will be a test of the direction which this government is taking. Is it pointing towards solutions, or exacerbating the problems?
Will it signal to British and international investors that it is worth putting money into productivity and growth, or simply continue to extract profit, while the long-term economy, and the welfare of all of us, collapses.