The Chancellor’s mini budget, announced on Friday, is, as most of the press is reporting, the most radical and fiscally loose budget by either party since the 1972 budget delivered by Tony Barber in Ted Heath’s government. It shows, alongside the new energy price cap, a government undeterred by fears of economic unorthodoxy and showing a self-confidence, and self-assurance, about policy that has not been seen for many years. Will these policies lead to success for the government?
To evaluate the possibilities here, we need to consider unpopular and radical budgets from the past 50 years, as well as appreciate the deep-rooted problems within the UK economy.
The UK Economy has one deep structural problem that has been known about for years; its productivity is much lower than most OECD countries, possibly made worse by large levels of labour immobility and lack of skills amongst the population, as the transition from a manufacturing to a services-based economy happened much quicker here than elsewhere in Europe.
For years, policies aiming to improve these issues have been put into motion by both parties, with little success. This has meant that the UK currently has a tight labour market, but with many underemployed workers, as skills possessed do not match up with the jobs available.
Since their arrival into Parliament twelve years ago, the Prime Minister and her Chancellor have been proposing radical measures to solve these problems, and now is the chance they have been waiting for. Large cuts in income tax across income brackets, scrapping national insurance rises and corporation tax increases, and stamp duty cuts, alongside increasing the scope and volume of new investment zones and scrapping caps of bonuses for bankers, speak to an ideological confidence not seen since the 1980s. Criticisms of decreasing equity across the economy have handed a political grenade to labour, who now go into the next general election in two years having to commit to raising income tax on millions of those who earn less than £50,000 a year.
Despite this, to stand a chance at the ballot box when the time comes, there must be material proof that the medicine is working. Thatcher was helped in 1983 by a weak opposition, clear material results in a reduction in inflation from 18% in 1980 to 4% in 1983 alongside a slowdown in the rate of increase in unemployment, and the gain from winning the Falklands War the previous autumn. She also had four years to prove things were getting better, with the radical, tax-cutting 1979 emergency budget and the tax-raising 1981 budget proving unpopular at first but yielding results. The new government has eighteen months to prove that these wide-ranging changes are working.
Furthermore, it seems like the government and the Bank of England are not working in tandem, with billions more in borrowing occurring at the same time at interest rates rising from 0.1% in December to 2.25% last week, with expectations of rates rising to nearly 5% over the coming year. This is further contributing to the belief globally that the UK economy is an inherently unstable one, with the UK having the most instable government in Europe, with the exception of Italy, having had four different prime ministers in the last six years. The radical changes of policy, from the deficit hawk orthodoxy of Osborne and Hammond to the almost neo-Keynesian policies of Sunak and Javid, to this new belief in the power of the supply-side under Kwasi Kwarteng, have not helped this view either.
In 1972, Tony Barber launched the largest fiscal boost the economy had seen for years, preparing the Heath government for an election in either 1974 or 1975, by cutting income tax and VAT, launching billions in new spending, such as a 12% rise in pensions, and cutting the pound loose from its fixed exchange rate. This backfired, with the pound weakening by 15%, growth stagnating, and inflation rising to over 25%, leading to Heath losing both elections in 1974 and the eventual need for the UK to be bailed out by the IMF in 1976. Given the pound has fallen by 20% already this year against the US Dollar, including a 4% decline on Friday alone, to leave the pound at its weakest level since 1985, there are significant fears that if the government does not have time to introduce the structural changes needed to rebuild the whole UK economy, a situation like this may arise again.
However, it is worth a shot. For years, Treasury orthodoxy and the fear of unpopularity has led to governments skimming around the significant issues in the UK economy, meaning that we are now in a weak position and these changes announced on Friday are risky but necessary to rebuild the UK economy to be internationally competitive while working for those living here. I just hope the Chancellor has read the books on the failures of the Barber Boom to avoid making the same mistakes.
