23 September 2022

Kwarteng brings in a ‘new era’ of British economic policy – one where growth comes first


When Boris Johnson became Prime Minister in July 2019, many free marketeers were cautiously optimistic that he would spearhead a new era of growth and prosperity, one underpinned by low taxes, regulatory reform and the primacy of personal freedom. Two and a half years, one pandemic, a cost of living crisis, and a new Prime Minister later, Liz Truss and her government have started to deliver on that promise.

Today’s ‘mini Budget’ was proof that the new government are not just talking the talk, but walking the walk: the Growth Plan released as the Chancellor spoke this morning states firmly that ‘economic growth is the government’s central mission’. Kwasi Kwarteng has put a number on in too, making a 2.5% trend growth target his medium-term aim. After more than a decade of post-financial crisis stagnation and low productivity, such explicit recognition of our central economic problem is hugely welcome.

Granted, when he was Chancellor, Rishi Sunak gave the occasional nod to the virtues of low taxes too, and had slated some income tax changes for a few years down the line. The key difference now is that the policy actually matches the rhetoric: jam today, not jam at some indeterminate point in the future. The Government’s tax cuts are unprecedented in modern politics—the biggest tax-cutting event in half a century—and represent the beginning of, in Kwarteng’s words, a ‘new era’ in British economic policy. The days of lazily judging every fiscal change by its immediate distributional impacts alone are over and the boosters’ are in the ascendancy.

Scrapping the planned corporation tax rise means we will avoid the serious damage it would have done to investment, wages and living standards, with macroeconomic feedback helping to cushion the expected blow to Treasury revenues in the medium term. By making the £1 million Annual Investment Allowance permanent, the Chancellor has also shown important recognition that the headline rate isn’t the end of the corporate tax debate.

Though taxes on businesses ultimately feed through to ordinary people, it’s today’s announcements on personal tax cuts that will be felt most keenly by voters. Bringing the 1p cut to the basic rate of income tax forward to April 2023 means it won’t be long before millions of us experience the obvious benefits of keeping more of our own money. Reversing November’s National Insurance rise means avoiding what Labour not long ago deemed a ‘manifesto-breaking, economically damaging and unfair tax on jobs’. The rabbit out of the hat – abolishing the additional rate of income tax – may be politically risky, but shows a willingness to look at the dynamic effects of taxation levels and properly back Conservative principles, regardless of the ‘optics’.

There’s a huge amount to do to fix our broken housing market, but a reduction in Stamp Duty – one of the most damaging taxes – was a good place to start. When housing is scarce, how we allocate it matters even more, but Stamp Duty keeps people in houses that are too small, too big, or too far away from jobs. Significant threshold increases, with special attention paid to first-time buyers, will do much to blunt those negative effects. Unlike the Covid-era Stamp Duty holiday, the fact these cuts are permanent means that positive effect will not just be a flurry of short-term activity offset by a slump in activity further down the line.

Tax cuts may hog the headlines, but they were nowhere near the end of the story. New Investment Zones will trial more radical measures on investment allowances on the local level. Importantly, they can become living examples of how tackling our sclerotic planning system can boost efficiency and growth. After promising ‘full fat’ freeports during Liz Truss’ leadership campaign, it appears that these zones will be delivered in the most effective way, ensuring local people really benefit from growth in their area.

And the politically difficult but economically damaging problem of bankers’ bonus caps has been tackled head-on: the Chancellor is right to ignore baseless hysteria about ‘trickle-down’ economics and focus on improving the competitiveness of our financial sector.

After 12 years of Conservative government, it now seems like we actually have one. But we shouldn’t be complacent – today’s changes are just the beginning of a road to a high-growth economy. Let’s hope there’s plenty more to come.

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Daniel Pryor is Head of Research at the Adam Smith Institute.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.