It’s starting to look like Brexit again, such is the hysterical, almost deranged reaction to Kwasi Kwarteng’s excellent budget. The response from many critics has been ridiculously exaggerated. Mr Kwarteng did what the Tories should have done at least as early as Brexit, tearing up Gordon Brown’s redistributive consensus to steer Britain towards a competitive low-tax economy that attracts global investment.
But for the technocratic left, which has grown accustomed to its ideological hegemony, this approach is anathema. As far as they are concerned, tax cuts for anyone earning more than the average income are always “wrong”; all tax increases on the “wealthier” can never be reversed; and only the “poor” are morally entitled to lower levies.
Too many otherwise intelligent people seem to believe, implicitly, that inequality is always bad, that in fact everyone should earn roughly the same, regardless of the work they do, their performance, their productivity or its ability to provide goods, services or capital. in a way that best meets demand.
Tax cuts are always considered a “cost”, as if the Treasury were entitled to 100% of GDP, and must always be justified. This is evidence of a deep bias. Why shouldn’t expenses be justified in the same way? Or all taxes? The BBC must be careful not to always fall into the same intellectual trap.
There is also a view, sadly shared by too many in financial markets, that this budget was a shocking and surprising kind of loosening of fiscal policy. This was not the case: almost all the policies were already known. We knew the cost of the energy bailout (and it’s probably smaller now) and that the corporate tax hike will be reversed and National Insurance reduced. The only real new policy has been the reduction in the top income tax rate – but why are the markets treating this as some sort of “populist” move? It’s quite the opposite: an unpopular measure but one that will make the UK more competitive and boost GDP.
It is nonsense for economists like Nouriel Roubini to claim that we have become an emerging market economy ready to be bailed out by the IMF. Yes, the markets are penalizing Britain, partly because the government needs to do more to explain its strategy, and partly because it now also needs to announce spending cuts and credible new fiscal rules.
But the markets are boiling everywhere. UK 10-year yields are up nearly 3 percentage points over the past 12 months, but French yields are up 2½, and the US and Germany 2¼.
All criticism is based on a limited understanding of economic history and all the bitter controversies that have pitted economists against each other for decades. Yes, Mr Kwarteng’s was the biggest tax cut since Anthony Barber was Chancellor in 1972. No, that doesn’t mean it will end in the same boom and bust. The Barber debacle was caused by the explosion in the money supply and excessively accommodative monetary policy. This is why it ended Keynesian orthodoxy and led to the monetarist counter-revolution that eventually propelled Margaret Thatcher to power. The same people who support tax cuts today – the free marketers, the Institute of Economic Affairs, the neo-monetarists, the Austrians – are the ones who spotted and warned about the Barber boom ( and also the Lawson boom, which also allowed demand to explode).
The problem is that many observers – including leftist economists in the United States, in financial institutions and international bureaucracies – do not understand what Mr. Kwarteng is trying to do. Their economic understanding is too narrow and conventional, their models flawed. He is a proponent of supply, not a Keynesian: he wants to strengthen the incentives to increase investment and work. Mr Kwarteng and free-market supporters believe it is the job of the central bank to control inflation and the role of the state to stimulate growth through reform.
The left stubbornly refuses to believe that anyone can believe that lower taxes stimulate growth: for them, the cuts can only be understood as an attempt to curry favor with the rich. The reality is very different: as always in economics, it is difficult to “prove” anything, but a seminal article in the Quarterly Journal of Economics in 2018 showed that high earners quickly see their incomes increase when their marginal rates increase. taxes are reduced, and the same is true with a lag for the rest of the population – and, yes, of course, inequality is increasing, but what about as the global economy grows? This is exactly what Mr Kwarteng hopes will happen, and the £2billion he gave up with his tax cut could actually be much smaller if more people work more or workers additional skilled move here.
The Growth Plan will only succeed if it is the start of a long-term strategy, as the government fully understands. Benefits must be reformed to encourage productivity: thus, part-time workers will be encouraged to work longer hours or seek better wages. Unions cannot be allowed to cripple infrastructure: tougher voting requirements will clip their wings. And regulation must continue on the bonfire, so it’s a good start that the remaining European laws must be torn up or replaced by the end of next year.
The government is preparing many other growth-friendly policies. Voters fed up with the stagnation and decadence of the past few years are hoping his strategy will bear fruit.