Budget day in 1988 was on March 15, and it happened to be the very day I completed my first property purchase — a flat near Clapham Common. Just short of my 27th birthday, I sat proudly within my very own bricks and mortar for the first time, waiting for a fridge to be delivered and listening to the chancellor, Nigel Lawson, on the radio. By teatime I was not only celebrating having a kitchen, but also that the taxes on a young professional like me were being slashed, with everything over 40 per cent abolished.
The very next day I bought a bigger bed than I had planned. Calculating how much more prosperous I would be, I rushed to place an advert for a cleaner in the corner shop. The budget led me within hours to spend more confidently. My friends and I were soon putting much more cash into the tills of shops and pubs. Each night out we were trickle-down economics in gushing, human form. It felt like a new era of opportunity had arrived, and that it would stay. There was no more talk of transferring to New York.
Not everything was so rosy in the subsequent years. A global revival of inflation meant my mortgage payments doubled at one stage. But the levels of taxes laid down by Lawson survived for over 20 years, giving certainty to living and working in Britain. Many of us still associate that day with economic confidence and political triumph.
It was impossible to listen to Kwasi Kwarteng last Friday without recalling that confident time; the ears of veteran Tory warhorses pricking up at the familiar sound of a near-forgotten trumpet. Once again, the glorious cavalry charge of conviction politics and slashed taxes gathers speed. Once more, the Conservatives can build a country for the young and ambitious, fuelling economic growth each day.
Let us hope so. But that will be far harder than in 1988, and the risks taken by the chancellor are dramatically greater. Today’s equivalent 26-year-old is in a different situation. They will be less likely to be able to afford their own property, although no doubt welcoming the reduction in stamp duty for when they can. The best paid among them will still pay a very high marginal tax rate, due to an unchanged 40 per cent threshold and expensive student loans. They will be aware that interest rates are expected to rise. Seeing a soaring deficit and knowing an election is on the horizon, they will be much less confident that tax reductions are here to stay.
When you think about the tax cuts at this individual level, you can see why they will not, on their own, spur immediate growth. Lawson’s reductions reached down to everyone paying income tax, at a time the country was repaying debt. They were consistent with the policies of previous years and had a full parliamentary term ahead in which to become embedded, so were seen as part of a stable and secure trend, compatible with careful stewardship of the public finances. All of these factors reinforced confidence, and all of them are absent today.
The prime minister and chancellor can be credited with being bold and decisive, and going in exactly the direction they said they would. But they have taken risks with inflation and debt that no Conservative government I served in would ever have contemplated, and that is being reflected in a serious loss of confidence in financial markets.
It would have been wise to take more precautions to make their direction politically and financially sustainable. Tax cuts focused on those ambitious young hard-workers and their lower paid colleagues could do more for growth, as well as electoral support, than removing the 45 per cent rate. An energy price cap that was less generous to better off households would give more incentive to reduce usage and also have added less to the ballooning deficit and the higher interest rates that will result from it.
It is not normally a good idea to borrow vast amounts of money at rapidly escalating rates of interest, unless you have a high level of confidence about enjoying a growing income. The entire approach of the government is staked on kickstarting growth, through deregulatory supply-side reforms as well as lower taxes. The example of scrapping the limit on bankers’ bonuses makes sense, as it only led to their being paid higher salaries instead. There are other sectors where muddled regulations hold the economy back, such as in satellites, clinical trials and artificial intelligence. Yet ministers will discover that many regulations are complex to change, or exist to make British goods and services acceptable abroad. They could become embroiled in grinding legislative battles to change regulations without making much difference to growth. The rumoured abandonment of rules requiring more environmentally friendly farming or tackling obesity would not produce growth but certainly create intense hostility inside and outside their own party. Be warned.
In advanced economies, growth depends on many factors, including the availability of skills, the existence of clusters of innovation, the supply of capital for expansion, access to markets, and long-term government commitment to nurture — and at least to avoid damaging — vital industries. Such considerations give the UK some advantages in particular industries, like financial services and life sciences, but in nowhere near enough industries for the economy to grow at 2.5 per cent for the next decade, as Liz Truss wants to see.
This is why Truss should push the cabinet into agreeing visas to bring in workers for expanding firms and why Kwarteng was right to change pension fund rules to free up more investment in riskier businesses. Rather unnoticed in the headlines and rhetoric of last Friday, he also announced a £500 million fund for long-term investment in technology and science, on top of all the existing commitments to spend more on research and development. Such plans should be part of a clear third leg to the growth strategy: to work with key sectors, from advanced materials to clean technologies, to make sure they can be part of an exciting purpose in the British economy; understood across education, finance and local government.
The PM has missed the opportunity to create a cabinet minister for science and technology, but she needs to intensify the focus of government on many industries that will be decisive in the quest for growth. They will have to compete with the US pouring resources into semiconductors, the EU going all out to build giant new battery facilities, and China seeking technological leadership across the board. In the 2020s, we need an active and intelligent state as well as one that knows when to get out of the way.
Ministers should acknowledge the need for that and set about it. This is not 1988, and tax cuts will not produce the effect they had then.
