While the idea of growing the economy is not wrong the timing is and the only way forward for the Liz Truss government is to do a complete U-turn.
Jonquil Lowe
That’s according to Jonquil Lowe a respected economist and personal finance senior lecturer at The Open University who says it is the one way to return the economy to a stable position more rapidly.
While the newly minted chancellor’s U-turn on abolishing the 45p tax rate for people earning in excess of £150,000 was welcome, Jonquil says it’s only a small part of an ambitious budget that would still aim to spend some £43 billion.
Just after the budget was revealed, Paul Johnson, Director at the Institute for Fiscal Studies (IFS), said that chancellor Kwasi Kwarteng was “not just betting on a new strategy, he is betting the house”.
The IFS says the mini budget is second in size to the infamous Anthony Barber budget, known as the ‘dash for growth’ budget of 1972. The 1976 sterling crisis followed, which meant the UK government had to ask the International Monetary Fund for help.
With the Bank of England buying the government’s public debt to offset the financial instability caused by the mini budget, Jonquil says until we know what Mr Kwarteng’s intentions for funding his growth plan will be on 31 October, the nation is left in a quandary.
She says this encompasses all of society, from the very poor to the very rich. Jonquil sees there are five methods open to the chancellor but none are easy choices:
Go back to the drawing board
“They need to go back to the drawing board and look for a more feasible and responsible way to pursue their goals. What they are proposing is not responsible and not credible.
“Liz Truss obviously has an ideology that is very free-market orientated – she is on record as saying former PM Margaret Thatcher is one of her heroes – but it is hard to see that this is the right time to try out these ideologies. We have an uncertain global backdrop. The economy is very fragile but it feels like she is adding to the fragility.”
Borrowing to fund spending
While the financial markets may give the chancellor a breathing space, a lot rests on the report from The Office For Budget Responsibility, which will be revealed on 31 October.
“We already know that the markets reacted badly when the chancellor revealed his initial plans for massive borrowing and markets could go into freefall again, if this is the favoured route, so this really isn’t an option,” says Jonquil.
Cut the welfare budget
“This will hit the less well off. Some of this is going on already with, for example, the benefit cap freeze. But the impact will be even worse if benefits are not increased with price inflation. A deeply disturbing aspect of welfare policies under this government is the idea that people are choosing to be on benefits and not putting effort into improving their situation.
“The majority of people are not on benefit out of choice – they have tough decisions to make about work/caring for children or frail relatives, and health conditions that might mean they can’t work in the jobs that are available.
“The idea that you would cut benefits for people making difficult choices flies in the face of economic justice,” says Jonquil.
Cut public services
“This again would hit the least well-off hardest, because low-income households tend to be bigger users of public services. For example, their car ownership is much lower increasing reliance on public transport. Lower income households can’t afford to opt for private healthcare or private education and they often live in areas with higher crime rates.
“Given the austerity measures that followed the 2008 crisis, public services are already pared to the bone. It’s hard to see how substantial cuts can be made to health, education, transport, policing or other public services without inflicting huge social damage, especially to the poorest.”
Rely on the government growth plan
“We don’t have the details but the government has hinted at a bonfire of regulations such as changes to planning permission and to reduce other regulatory burdens. Already announced are cuts to the corporation tax, which was due to increase from 19% to 25%, to help stimulate growth in UK companies.
“But a lot of smaller businesses say cutting corporation tax is not a priority. It affects profit only once it has been made but the challenge is making profits in the face of the energy crisis and other escalating input prices.
“What is even more controversial is the government’s claim that a trickle-down effect means growth will benefit everyone.”
A paper from the International Inequalities Institute at the London School of Economics is among the most recent research to challenge this. Out of 18 countries in the Organisation for Economic Co-operation and Development (OECD) that had tried this method to stimulate their economies, they did not find any evidence of ‘trickle down’, says Jonquil.
Where that leaves us
“The idea that the energy price guarantee has solved households’ problems for the time being is wrong. Lower income households are basically below water now – they are not able to heat their homes, eat and pay rent.
“We hear harrowing tales of people who are at their wits’ end on how they will manage. Many of them are in a position now where they cannot cope,” said Jonquil. “They certainly cannot bear the additional pain that cuts to welfare and public spending would inflict or the fall-out from financial market turmoil.”
Jonquil Lowe is a former stockbroker who became head of money research at Which?. She has written around 30 books on personal finance including ‘The Good Retirement Guide’ (Kogan Page).
