Before looking in detail at this Budget, it is worth reminding ourselves that the economy is the system we as a country have chosen to put in place to optimise the production and distribution of valuable goods and services for the benefit of our population. There is a wide array of choices open to us about how that system could operate – ranging from a command economy, as we had during WWII, through Golden Age capitalism all the way through to market fundamentalism. There are around 200 countries in the world, and they all make different choices.
What choices has our government made? In the long-term, it remains committed to market fundamentalism; and in the short term, this Budget provides a non-solution to the wrong problems in order to keep its donors happy.
Despite repeated claims to be responsible and a safe pair of hands, prepared to take decisions “of eye-watering difficulty” to solve the UK’s problems, we see that the government has ducked the real problems the country faces:
- The UK faces crises on multiple dimensions: the economy has been weak since 2010 and is set to become weaker still, most people have been getting poorer throughout this period, public services are on the point of failure and the climate emergency is largely unaddressed;
- The government plans to ignore these issues and tackle other problems altogether and to do so in such a way that it will fail; so
- The result will be a further disaster for the people of this country.
We are at a point where the fabric of the nation is at threat of lasting and perhaps irreparable damage – unless we stop the government from implementing its plans.
The UK is in Crisis
We have had low economic growth since 2008 – largely as a result of austerity and Brexit – and growth is now turning negative. We have experienced falling real (inflation-adjusted) wages since 2008 – the longest period in recorded history. Austerity has also given us failing public services, including an NHS on the verge of collapse.
While the world faces an environmental catastrophe, this government is still arguing about whether to permit renewable energy development on British farmland.
We face the risk of extraordinary and lasting damage to the fabric of UK society: mass impoverishment, falling life expectancy, failing health, lower standards of education, lower productivity – as well as all the consequences of climate change. These are the problems a responsible government would address – boldly.
Let us remind ourselves for a second about how the government of Clement Attlee handled the post-war problems. Attlee’s government would have had plenty of excuses for non-delivery. Government debt to GDP stood at over 250% at the end of the Second World War; the cost of servicing that debt was over 5% of GDP; more than half of national income had been diverted to the war effort and over 5 million people mobilised into the Armed Forces; some 5% of national wealth been destroyed, and 1% of the population lost (and the equivalent figures were even worse in some other countries).
This was, of course, a far greater challenge than we face today.
But the national mood was different then. As Margaret McMillan, Professor of International History at Oxford University, explained, “The shared suffering and sacrifice of the war years strengthened the belief in most democracies that governments had an obligation to provide basic care for all citizens.” That shared suffering and sacrifice may have been necessary to win the war. As evolutionary biologists David Sloan Wilson and Edward O Wilson put it, “Selfishness beats altruism within groups. Altruistic groups beat selfish groups. Everything else is commentary.”
Along with a mood of altruism and solidarity, there was one of hope. After six hard years, during the early part of which defeat seemed inevitable, the UK and its allies had emerged victorious. Even more than is usual after a war, the victors felt that good had triumphed over evil. Yes, there was a challenging task of reconstruction – but that was nothing compared with the challenges of the war itself. The national mood then was one of hope and solidarity.
In 1948, at a time when the ratio of government debt to GDP was still over 200%, government founded the NHS. Also in 1948, it passed the National Assistance Act, which abolished the poor law system and established a social safety net to protect the poorest and most vulnerable, completing the work of the National Insurance Act of 1946.
The social contract in the UK was transformed. Everyone, whatever their background and current financial state, had access to high-quality healthcare. Everyone had access to a safety net for times when things in their lives went wrong. Everyone played a part in building this new world. And the UK economy benefited hugely: the Golden Age of Capitalism was the most successful period in the UK’s economic history.
That is how a responsible government would react. Let us now turn to today’s government.
The Government Plans – And Will Fail – To Tackle Others
The government has chosen to focus on the wrong problems, which it will fail to resolve. It will focus on the level of government debt:GDP and on inflation. These are the wrong problems; and it will solve neither.
Debt:GDP is now around 100% – which is the 300-year average – and is not high compared with many other leading economies. ‘Containing debt:GDP’ has always, however, been a potent rhetorical weapon for those who search for reasons to cut public spending. As the Institute for Fiscal Studies (IFS) comments:
“The Chancellor has felt obliged to relax his fiscal mandate. He is no longer looking to balance the current budget at all, and has pushed out to five years the point at which he says he wants debt to be falling as a fraction of national income. Even so, he has had to announce a package of tax rises and spending cuts amounting to around £50 billion (about 2% of GDP) to meet his new mandate.”
This comment is revealing of a critically important but under-reported truth: the “£50 billion black hole in public finances” is simply the difference between what the deficit is likely to be and what the Chancellor’s new self-defined mandate says it should be. It is not an absolute reality; it is merely an arbitrary figure that Sunak and Hunt have chosen to be the size of their ‘black hole.’
The Office for Budget Responsibility (OBR) forecasts that the cuts to public spending Sunak and Hunt propose, coupled with rising interest rates, will plunge the economy into a serious recession. It predicts that the economy (which we would normally expect to grow almost every year) will not regain its 2019 size until late 2024.
And the IMF predicts that the UK’s economic performance will fall ever-further behind other developed economies.
These charts alone are evidence enough that this Budget is a disaster for the UK.
And, with all this economic damage, the government will not even succeed in reducing debt:GDP. Over the last 300 years, the number of times we have noticeably reduced debt:GDP while shrinking our economy is … zero. Not only can you not shrink to greatness, you cannot shrink your way to a low debt:GDP ratio.
The second issue is inflation. Inflation in the UK is not caused by excess domestic demand – and therefore it will not be cured by reducing domestic demand (which has been deficient since 2010). Raising interest rates only harms the economy further. And as we have previously argued, the inflation we face is likely to be short-lived. The OBR agrees: it forecasts inflation below the 2% target from 2024-2028. Most of this fall will not be the result of domestic policy – it will happen regardless as global energy prices subside.
The government has picked the wrong problems to focus on – precisely to avoid having to take difficult decisions – and it will fail to solve either.
A Further Disaster for the People of This Country
The government has used its familiar rhetoric of “sharing the pain”, all being “in it together” and “those with the broadest shoulders” bearing most of the load. But, as the Financial Times asked,
“have they really targeted the pain on those with ‘the broadest shoulders’ — or just those who are easiest to lean on? …
Anyone who is seriously rich will be relieved that the chancellor did not align CGT rates with income tax, which would have cost them far more than simply lopping £6,300 from the annual tax-free allowance.”
The reality for normal people is that they will be asked to take a combination of body-blows.
Falling real wages – worse even than recent years. Real (inflation adjusted) wages will be no higher in 2023 than they were in 2003. A twenty-year period of wage stagnation is unheard of in modern UK history. For generations, British people have assumed that we would experience economic progress, and until recently, they were right; but for the last 12 years, there has been nothing but regress.
The cost to the median earner of government policies is already over £150 per week – and as the OBR says, it is about to get much worse. Many people simply cannot afford that.
Rising stealth taxes – the tax thresholds will not rise in line with inflation. In real terms, they will be around 10% lower, so more people will find themselves pushed into higher tax brackets even as their real incomes are falling.
Higher costs of energy in the medium term – the Budget will allow the price cap to rise further, to £3,000 – around three times more than it was in October 2020. This will cause serious pain to many families.
Higher mortgages – this will be an even harder body blow than the energy prices. For many people and small businesses, the combination will be literally unaffordable: they will be pushed into bankruptcy.
It is common to see newspapers compare the impact of a budget on different types of individual/family. It is also common to ignore the truly wealthy in such comparisons. As we argued recently, this is a serious error for two reasons: 1) the distribution of wealth is so extreme that a significant proportion of the total gets ignored if we treat the wealthy as outliers and 2) that their extreme wealth gives them the power to distort the functioning of our democracy.
As a thought experiment, here is a comparison which does include the seriously wealthy. The calculations are in real terms – hence the falling real incomes. Inflation is assumed to be 10% and wages/salaries are assumed to grow at 5%. Investments are all assumed to return 5% (real) per annum.
|Type of individual
|Economic Income 2023
|Single parent earning £30,000 (median wage)
|£28,571 plus investment return of £500
|Reduces from £3,486 to £3,429
|Disposable income falls 5% from £26,514 to £25,143
Total disposable economic income is £25,643
Total tax is around 13% of disposable economic income
|Successful young professional earning £100,000
|£95,238 plus investment return of £2,500
|Reduces from £27,432 to £26,670
|Disposable income falls 6% from £72,568 to £68,568
Total disposable economic income is £71,068
Total tax is around 38% of disposable economic income
|Billionaire drawing salary of £2 million
|Investments: £1 billion. Average age of investments: 20 years
Decides to realise £4 million to buy another house.
|Salary: ~£1.9 million
Investments rise by £50 million to £1.05 billion of which 0.05% is sold to fund purchase of new house.
|Income tax reduces from £879,932 to £838,899
Capital gains tax on disposal is £791,032
|Total disposable economic income is ~£52 million, which is around 5% higher than the previous year.
Total tax is ~£1.5 million or around 3% of total disposable economic income.
Just compare the effective tax rate paid by median earner and the professional on £100,000 with the rate paid by the billionaire. The median earner pays around 13% of his or her total economic income in tax; the professional pays around 38%; the billionaire pays around 3%. Can that be right?
We can see that the Financial Times was spot-on: the decisions the Chancellor has taken may be “eye-wateringly difficult” for ordinary people and even for successful professionals, but they pose no issues for the extremely wealthy who are protected by this government because they are rather difficult to lean on.
Without change, the UK will see:
- Weakening international position – the UK falling further behind what used to be its peers;
- Failing public services and no investment in future prosperity: the NHS and Education are particularly at risk. And it is hard to see how we can hope for a healthy economy without a healthy and well-educated population.
- Lip service being paid to tackling climate change: the Budget was the opportunity for a major national investment programme to insulate houses and move to renewable energy generation starting now. The government has said it may do something after the next election.
Imagine a house that had been neglected for the past 12 years: the roof had begun to leak and some of the windows were broken. The boiler was no longer safe and could not be used. The house had become cold and damp – and rot was starting to penetrate the timbers.
The Truss/Kwarteng Budget, noticing the cold, damp and rot, decided to pile up all the furniture in the living room and set light to it. Fortunately, before the fire was lit, they were replaced. The Sunak/Hunt Budget has decided to ignore the cold, damp and rot, and instead to fix a leaking tap in the bathroom.
We simply cannot afford this government to continue its negligence towards the fabric of this country. Even just a couple more years at this rate of destruction may take us decades to recover from.
The polls show that the Conservatives are highly vulnerable, and that is a time when they listen to public pressure. The UK public have now forced out two Prime Ministers – it is time for the third to go. Please take five minutes to write to your MP calling for a change of leadership. These notes make it easy.
And if you would like to help, please join up to the 99% Organisation.