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November 17, 2022 will be a day of doom for the UK as the Chancellor of the Exchequer, Jeremy Hunt, lays out his and Rishi Sunak’s new economic plan.

This plan is likely to increase taxes dramatically for the foreseeable future — years, rather than months.

When Kwasi Kwarteng was Chancellor I had hope for our economic future. Regardless of what Jeremy Hunt says next week, Kwasi’s plan will be proven in the years ahead to have been the right one for the UK.

An economist explains

In an October 16 article for the Telegraph, Liam Halligan, an economist, journalist and broadcaster, explains why the Truss-Kwarteng plan was good.

Its title is ‘The trashing of Truss’s mini-Budget is an economic tragedy’.

Excerpts follow, emphases mine:

The financial and political meltdown of recent weeks has seen Kwasi Kwarteng’s proposals dubbed “radical”, “libertarian” – even “grossly irresponsible”. But that’s demonstrably untrue.

Back in September, the then-Chancellor proposed lowering the top rate of income tax from 45pc to 40pc – the level it was for almost the entire period New Labour was in office under Tony Blair and then Gordon Brown – hardly “libertarian” Prime Ministers.

Kwarteng also pledged to reverse former Chancellor Rishi Sunak’s 1.25 percentage point rise in national insurance contributions – allowing 28m people to keep, on average, an extra £330 of their earnings each year. This largely non-controversial proposal was also endorsed by Keir Starmer’s Labour party.

His Majesty’s Opposition backed Kwarteng’s mini-Budget plan to cut the basic rate of income tax from 20p to 19p in the pound from 2023, a year earlier than Sunak proposed but, again, hardly a radical move.

That means Labour fully agreed with two of the three main measures tabled by Kwarteng, amounting to £24bn out of a tax-cutting package worth around £43bn. But Starmer’s party did oppose Tory plans to keep corporation tax at 19pc, rather than increasing it to 25pc next April – a rise previously enacted by Sunak.

So the only major “irresponsible Tory tax cut” Labour didn’t support wasn’t an actual cut, but a freeze in taxation. Yet that didn’t stop Starmer relentlessly referring to “a Tory crisis, a crisis made in Downing Street”. Labour’s Treasury team, in fact, having backed almost all Kwarteng’s main measures, now wants “this entire mini-budget to be reversed”.

Well, Labour got its wish.

Since mid-October, Labour have repeatedly accused Truss and Kwarteng of ‘crashing’ the economy.

Halligan readily accuses Truss and Kwarteng of poor communcation in presenting and defending their short-lived economic plan, which they called a ‘fiscal event’, as it was not a full budget. However, he says that the policies themselves were responsible.

Halligan says:

… what was a bold, but far from irresponsible set of policy proposals has – through a combination of bad timing and woeful communication – sparked serious financial turmoil, roiling the UK gilts market, pushing up broader borrowing costs and spreading mortgage and pension panic.

It’s vital to grasp, though, that this chaos was triggered by the Government’s inept handling of its policy measures, not the measures themselves.

He makes it clear that the fiscal event was not in itself the underlying cause of the economic turmoil which followed:

while the Truss government’s actions as a whole – the policies and their disastrously botched presentation – were the catalyst behind recent gyrations of sterling and the upward movement of borrowing costs, they were not the underlying cause. To suggest otherwise is politically disingenuous. It is also fundamentally to misunderstand what is happening across global markets and why.

This mini-Budget, in total, amounts to an attempt – after a two-decade upward trend of rising UK taxation – to lower the Government’s tax take from 36.5pc to 36pc GDP.

With the state’s share of national income heading for sustained levels not seen in the 70 years since World War Two, Kwarteng and Truss were trying to put that tax share back where it was in 2021.

Halligan rightly blames the worldwide excess of QE, quantitative easing, so prevalent over the past 15 years:

What we’ve actually seen over recent weeks is just the latest stage in the long-term global shift away from a decade and more of ultra-low interest rates and excessive quantitative easing (QE). Many of the major economies, not least the UK and US, have indulged in irresponsibly loose monetary policy since the 2008 financial crisis. Initially necessary emergency measures were allowed to ossify into a lifestyle choice.

Endless QE juiced up stock and bond markets, making the rich richer while pushing the price of assets such as housing further out of reach for ordinary families. Such “extraordinary measures”, cheered on by groupthink economists, kept state borrowing costs low, paying for lockdown and allowing governments to gorge themselves on debt.

Now we are finally paying the piper for the always obvious excesses, dangers and utter stupidity of these policies. Interest rates are starting to spring back, with indebted governments, households and firms forced painfully to retrench.

Just days after Kwarteng said that the top tax rate of 45% — introduced by Gordon Brown around 20 years ago — would be removed, the media and ‘experts’ said it had to stay. Truss announced a U-turn just before the Conservative Party conference began:

That set up the chance of generating a lucrative “doom loop”, selling the pound short, then turning more profit as media outrage caused the currency to fall even more.

Halligan takes Kwarteng and Truss to task for not explaining where their economic growth would come from, which made matters worse. Recall the noise from their opponents about ‘unfunded tax cuts’.

Unfortunately, sterling is vulnerable at this time:

Britain has a big balance of payments deficit and is a significant energy importer with scant storage capacity at a time of geopolitical peril.

We have only to look at what then-Chancellor Rishi Sunak spent during the pandemic and the war in Ukraine which followed just as we thought we’d get a breather.

Halligan wrote his article the day after Truss sacked Kwarteng and replaced him with the Establishment-minded Jeremy Hunt, who immediately began rolling back Kwarteng’s reforms:

Jeremy Hunt’s tour of the TV studios on Saturday morning was a further attempt to pour oil on troubled waters as the new Chancellor raised the prospect of further tax increases and spending cuts. Its effectiveness remains to be seen.

It’s also alarming that the latest policy sacrifice has been to go ahead with a previously scrapped rise in corporation tax from 19pc to 25pc.

For tens of thousands of small and medium-sized enterprises, this is disastrous.

These companies account for over half of Britain’s GDP and two thirds of employment. They’re the engine of our economy. They were hammered during lockdown and Truss has just taken 6pc off their often thin profit margins. Many will struggle to survive.

By hiking corporation tax, Truss is harming the prospects of small businesses and alienating millions of them, many run by and employing natural Conservatives. She is also scuppering the best chance she has of rapidly achieving her “plan for growth”.

A ‘very British coup’

On Sunday, October 17, the Telegraph‘s Tim Stanley wrote ‘I resent this “very British coup”. Any Tory who welcomes it is a fool’.

Any true conservative should keep this in mind when they watch Hunt deliver his budget next week. Stanley’s subtitle reads:

Deviate from orthodoxy, and you’ll be crushed by the Remainer, ‘expert’-driven establishment

He is not wrong.

Although he did not approve of Kwarteng’s plan for its ‘policies and philosophy’, we face a perilous time ahead, especially with regard to Brexit:

Reputationally, the Conservatives are sunk. Labour will win the next election; Brexit is imperilled. Hitherto the argument against Brexit was emotional, but watch as it becomes technocratic: “in light of our political and economic turmoil”, the grey men will say, “it’s not something we can afford.”

Truss was made a whipping girl for what happened after Kwarteng’s fiscal event. Cast your minds back over the past month. What Stanley predicted happened:

… make no mistake, those hollow-men are back in charge. The imposition of Jeremy Hunt as chief executive to Truss’ chairman of the board – the language is theirs, not mine, and tells you everything you need to know about their ghastly worldview – is a reassertion of orthodoxy, revenge of the Remainers, capture by experts. British policy, you see, must always operate within certain parameters; anyone who dares to step an inch too far to the right or the left will feel the full force of the establishment. Not by sending in the army, that would be unBritish and, besides, we haven’t got an army to send – but by the removal of confidence, via the markets, the Bank, the IMF or our good friend, Uncle Sam.

Stanley rightly blames Andrew Bailey, who heads the Bank of England:

The Bank kept interest rates ridiculously low while pumping our economy with cheap money, fuelling an inflationary spiral that it now believes is the sole job of the Treasury to cure. It was Andrew Bailey, widely criticised for poor judgement, who finished off the arrogant Mr Kwarteng when, last Tuesday, he informed pension funds that he’d stop bailing them out on Friday.

Stanley perceives an anti-democratic trend that emerged in 2022:

After a few, bright years of grassroots activism and open debate – the essence of Brexit – there is pushback against democracy. This year, the Conservatives have kicked out a PM who won a landslide and then effectively imprisoned a second PM who, for all her faults, was at least elected by the members. Mr Hunt, by contrast, was beaten solidly by Boris in 2019 and didn’t even make it past the first round against Truss. He has no popular mandate.

… Comrades, we’re in for two years of painful austerity …

At least two years. I predict more.

Stanley concludes:

I am not saying there is a conspiracy afoot. There’s no need. Our system is ancient, sophisticated and surprisingly transparent. We have a way of doing things, old bean, and we make it gently inconceivable to do it any other way. This is the dictatorship of consensus.

The Establishment view

Writing for the Telegraph on the day that Truss sacked Kwarteng, October 15, Jeremy Warner said, ‘Project Fear was right all along’.

He began with this condemnation of Brexit:

Call it revenge of the Remainer Establishment, if you like. The revolution in the British economy promised by Leave campaigners six years ago finally seemed to go the way of all revolutionary movements this week: it ended up eating itself.

Downbeat predictions by the Treasury and others on the economic consequences of leaving the EU, contemptuously dismissed at the time by Brexit campaigners as “Project Fear”, have been on a long fuse, but they have turned out to be overwhelmingly correct, and if anything have underestimated both the calamitous loss of international standing and the scale of the damage that six years of policy confusion and ineptitude has imposed on the country …

Perhaps I exaggerate, but not since the humiliation of the International Monetary Fund bailout in 1976 have we seen an unravelling quite as spectacular. This too from a Tory Government with a substantial overall majority. It is scarcely believable.

Hmm …

Warner blamed ‘unfunded tax cuts’, saying that a cut in corporation tax was derisory and that, ultimately, Liz Truss would have to go:

… the fact is that Truss was in lockstep with Kwarteng in challenging “economic orthodoxy” and the institutions that were its standard bearers. On the campaign trail she was, if anything, even more of a zealot for economic radicalism than Kwarteng.

In any case, she plainly didn’t understand the sometimes destructive way markets interact with policy. It’s been a rude awakening.

Warner is grateful that Andrew Bailey intervened:

In the end, it was Andrew Bailey, Governor of the Bank of England, who brought matters to a head, by insisting that there would be no extension to the bond buying programme he had initiated to counter forced selling by UK pension funds.

This has been widely portrayed as another foot in mouth episode by a Governor with something of a reputation for gaffes. Having failed, despite all the warning signs, to see the surge in inflation coming, the Bank fully deserves whatever criticism is thrown at it. The Bank has failed to conduct itself well in recent times.

Even so, the Governor had little option but to say what he did. It makes no sense at all for a central bank, which is supposed to be tightening policy to fight inflation, to be simultaneously loosening it through resumed asset purchases …

By making the programme time-limited, the Bank was able just about to pass its intervention off as justified on financial stability grounds. It would have been game over had Bailey made the programme open ended.

Warner was clearly glad the Establishment was in charge again:

“Economic orthodoxy” is back in the saddle. But then it never really went away. Instead we had a brief aberration in which the Government, having dispensed with all sensible advice, thought bizarrely that it could defy gravity.

If it had been done differently it might have succeeded, but it was not. We’ll be paying the consequences in reduced standing and prosperity for years, if not decades, to come.

He blames Truss and Kwarteng for a short-lived plan that was never given a chance.

Note that he has nothing in his article about QE, which really will make us pay the consequences for many years to come.

The Bank of England gets revenge

The Bank of England was offended that Kwarteng never consulted them before his fiscal event.

He probably should have done so.

Perhaps he thought they would have said ‘no’.

On Thursday, October 20, The Times reported that Sir Jon Cunliffe, deputy governor for financial stability of the Bank of England, appeared before Parliament’s Treasury Select Committee:

Sir Jon Cunliffe told a hearing of MPs that Kwasi Kwarteng, the former chancellor, did not brief Bank officials before the September 23 fiscal statement, in which he announced more than £40 billion in tax cuts.

Cunliffe said the Bank had been aware of some measures that were pre-announced, but added: “We did not get the normal briefing we would get for a budget . . . This wasn’t a budget. The process was rather different.”

That’s the polite British way of saying that they were miffed.

Cunliffe also said that there were no figures from the OBR — the Office for Budget Responsibility — to back up Kwarteng’s plan. This is the same OBR that cannot predict anything accurately. The OBR were not due to make a projection until November, as I recall:

“When [the Treasury] briefs us normally on the budget, we see the Office for Budget Responsibility costings and that is what we take into account for monetary policy. But there were no OBR costings. It was a different sort of event in many respects,” he told the Treasury select committee.

However, all is well now that Jeremy Hunt is Chancellor:

Cunliffe said he expected the Bank to get a full briefing on the contents of the upcoming medium-term fiscal plan from Jeremy Hunt … The plan is expected to lay out new tax-raising measures, cuts to public spending and the government’s new fiscal rulebook, along with the OBR’s assessment …

It all sounds rather scary. This is a long-term plan to make the middle class poorer, make no mistake.

Meanwhile, global turmoil in world markets

When these articles were written, Western economies were in turmoil.

This had nothing to do with Kwasi Kwarteng or Brexit.

On Thursday, October 14, the Japanese yen had hit a 32-year low against the US dollar and mortgage rates were rising in the US:

On October 15, Germany’s inflation rate reached a 70-year high. We cannot blame Brexit, Kwarteng or Truss for that:

We are in for years of obfuscation ahead.

I am not looking forward to Jeremy Hunt, with his supercilious smile, mansplaining to us the ‘difficult decisions’ he will have to take. He is a successful businessman. He has no idea how ordinary Britons live.

Worst of all, he will lie and lie about the costs of Brexit, of this we can be sure.

As for Rishi? I don’t trust him an inch. He’s already promised billions in climate change reparations this week at COP27. Those won’t be one-off payments, either, even though they’ll be billed as such.

What about the British taxpayer? Answer there came none.

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