Have you heard the joke about trickle-down economics? Ninety-nine percent of you won’t get it. This gag has been doing the rounds on social media in the UK since the new chancellor of the exchequer, Kwasi Kwarteng, revealed his “mini budget” last week.
In support of an overarching economic growth strategy Kwarteng slashed the income tax rate from 45% to 40% for the highest earners, those making more than £150,000 (R3m) a year. Those in this earnings bracket are estimated to number about 600,000 Brits, the literal “1%”. Kwarteng also scrapped the cap on bankers’ bonuses and slashed stamp duty.
This boost for the wealthiest comes during a cost of living crisis for most average earners. As such, some commentators have alleged the new government is waging a “class war” because it is captured by the hard-right of the party, comprising a ruthless group of aristos and arrivistes who live in a parallel reality to “ordinary people”.
Many economists, including former US Treasury secretary Larry Summers, are appalled. The pound and UK gilts fell immediately as markets made clear they did not think now was the time to pursue a borrowing-fuelled growth strategy alongside a huge cost of living support package. The imminent package of £150bn is double what was rolled out by former chancellor Rishi Sunak during the height of the pandemic. Markets are spooked because the consensus is that the UK may soon be “maxed out”, and that trickle-down economics simply does not work.
For all the talk of a small state underpinning modern conservatism, it is an idea that has become incompatible with economic and geopolitical reality. Despite their natural political instincts, Sunak and Kwarteng have been forced to harvest the “magic money tree”, as Labour’s economic policy ideas are often derisively referred to by Conservatives.
Not yet in the post for 20 days, the chancellor has certainly come out with a bang and firmly signalled his ideological paradigm to markets. I suppose in some sort of tired 1980s world view, the chancellor and Liz Truss, the new prime minister, could be described as “neoliberal extremists”, fanatical adherents to free market capitalism. Long-time ideological soul mates, Kwarteng and Truss really do believe hard work, and the economic growth they believe to be its fruits, are the routes to prosperity.
Devil’s advocate
This was set out in the book Britannia Unchained: Global Lessons for Growth and Prosperity, authored by Kwarteng and other Tory MPs in 2012. The text helps one understand the gamble they are taking on the economy now, even if you dislike their logic. The theory is that by rewarding the highest earners (read: “hardest workers”) enterprises expand and more jobs are created. This will also attract the brightest and the best bankers and businesses to the UK, supported by further low-tax, pro-business measures.
It is tempting to join the chorus of disdain and see only a lack of regard for the poor in Kwarteng’s recent economic announcement, but a devil’s advocate might point out the top rate was actually 40% under Labour’s Tony Blair. The 45% band was introduced by Gordon Brown. With a PhD in economic history from Cambridge, Kwarteng will be well aware of the historical arc of his decision. As Fraser Nelson pointed out in The Spectator at the weekend, Sunak apparently wanted to abolish the top band but chickened out as it was considered too politically risky.
Nelson also points out that the UK government takes in £900bn in tax, and the “superband” only ever contributed £2bn to this. It was never meant to raise serious money, he says, it was Brown’s parting “gift” to the Tories. This may be so, but scrapping it remains a high-stakes economic and political gamble.
• Dr Masie, a former senior editor of the Financial Mail, is chief strategist at IC Publications in London.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.