will Kwasi Kwarteng's plan deliver growth?
- Written by Steve Schifferes, Honorary Research Fellow, City Political Economy Research Centre, City, University of London
The UK economy has been dogged by slow growth[1] for a long time. Combined with even slower growth in productivity[2], it has meant virtually no increase in living standards for the average family over the past decade.
Now the new chancellor, Kwasi Kwarteng, has unveiled what he says is a radical plan to get growth back to its historic average of 2.5% per year. This would be an increase of about a percentage point, lifting living standards and providing more money for public services.
The central part of Kwarteng’s mini budget[3] involves cutting taxes in the hope of providing greater incentives for individuals and businesses to work harder and invest more, in what are the biggest net tax cuts from a chancellor since the early 1970s.
Much of this will benefit the better-off more than those on lower incomes, but the government argues that higher growth and not redistribution is the priority, and that this will benefit everyone as the economic pie becomes bigger. So will this work?
Net tax cuts of UK chancellors
TradingView[15]
The government argues that over five years, if its strategy boosts growth, it would add billions of pounds to tax revenues to service the debt, as well as increasing the overall size of the economy and therefore reducing the debt-to-GDP rate. The markets have nevertheless reacted with concern[16], dumping UK government bonds and the pound after the announcement.
Where this leads
The government is clear that its reforms will only deliver benefits over the medium term. But short-term economic problems could derail the plan and threaten the chances of an election victory – most likely due to be contested in 2024.
The model of Liz Truss’s new government rehashes the strategy of the Thatcher government in the 1980s, where tax cuts and deregulation arguably helped to boost growth. But tax rates were much higher then, and the size of the state industrial sector was much larger.
Read more:
Why Liz Truss is no Margaret Thatcher when it comes to the economy[17]
A more worrying comparison, where the “dash for growth” foundered over short-term economic problems, might be the “Barber boom[18]” introduced by the 1970-74 Conservative government. A huge economic stimulus led to soaring inflation, public sector pay strikes, and a foreign exchange crisis, leading to the government’s defeat in the 1974 election.
This is a dramatic shift in government policy that faces many obstacles. There may well be a rocky road ahead before we see whether this gamble on growth yields the result that its proponents are promising.
References^ slow growth (data.worldbank.org)^ in productivity (theconversation.com)^ mini budget (www.bbc.co.uk)^ IFS (ifs.org.uk)^ substantially reduced (www.reuters.com)^ planning to (www.theguardian.com)^ not necessarily boost productivity (www.oecd.org)^ previously announced plans (www.cityam.com)^ Statista (www.statista.com)^ in the UK (www.reuters.com)^ historically much lower (www.instituteforgovernment.org.uk)^ estimates that (www.heraldscotland.com)^ Growth Plan 2022 (assets.publishing.service.gov.uk)^ £200 billion (ifs.org.uk)^ TradingView (www.tradingview.com)^ reacted with concern (www.ft.com)^ Why Liz Truss is no Margaret Thatcher when it comes to the economy (theconversation.com)^ Barber boom (www.ruffer.co.uk)Read more https://theconversation.com/mini-budget-will-kwasi-kwartengs-plan-deliver-growth-191285
