Ominously omnishambolic, the government’s budget has brought the country to the brink of financial implosion. The markets were horrified by a lack of clarity and credibility. An important feature has been the impression that the prime minister and the (now former) chancellor can’t add up and have been talking … blather. Andrew Levi explains.
Nightmare on Downing Street
So tragically poorly prepared was Kwasi Kwarteng’s 23 September budget bombshell that the markets took fright and five days later, as a direct result, the UK pensions industry came within hours of obliteration.
No need to believe me. Well-sourced reporting in the Financial Times suggested 90 per cent of UK pension funds were about to collapse, and with them the entire UK financial system. A £65bn promise from the Bank of England saved the day.
The fear of financial market participants, and many respected economists and commentators, was that the potential gap between planned government expenditure commitments and projected tax-take was likely to be unsustainably large. There’s much to discuss there: enough for a whole article, or several.
But one of the most disturbing features, which bodes very badly for the future – at least while Liz Truss remains prime minister – was how facilely and crudely she and her chancellor told falsehoods about the key budget numbers. A prominent example was at prime minister’s Questions on 12 October.
Tax Cuts Aren’t Just For Christmas
The Truss-Kwarteng claim was that by far the larger part of the budget, in financial magnitude, was the energy payments support package.
No one can be sure how big the pay-out will have to be. But a widely accepted estimate is up to £150bn over two years and assumed, for the purposes of the calculation, to be strictly time-limited.
Regarding the tax cuts as proposed on 23 September, a lower-end estimate of their impact was a reduction in tax-take of £45bn per year. (Of the £45bn, the majority was the reversal of previous budget decisions to raise Corporation Tax and National Insurance, with the two Income Tax reductions – from 20 to 19 per cent, and 45 to 40 per cent – representing a smaller, but still significant, part of the budgetary impact).
On this basis, Truss and Kwarteng suggested that anyone who was in favour of the energy bailout – and who couldn’t be, after all? – had no business criticising the much smaller tax cuts. How could such a tiddly part of the budget package reasonably be causing so much panic from cosmopolitan financial markets types, or justify such virulent criticism from champagne socialist North London Keir Starmer, suspiciously elite economists, and unpatriotic, remoanery ‘MSM’ journalists?
How, they almost-word-for-word asked, can £45bn be bigger than £150bn?
Clearly – and we might breathe a sigh of relief at this – they never had a puppy, or they would have known it’s for life, not just for Christmas.
Suppose the (pedigree) little dog cost £1,000 up front, and annual feeding and other costs were £300. Which is the larger amount? You know, of course. You’ll probably have the dog for ten or more years. So the running costs are maybe triple the initial payment.
Time Isn’t An Illusion – When It Comes To Money
If we apply the same approach to the budget, we see that the tax cuts – by their very nature (in fact it’s the main point of them) – are meant to run for the indefinite future, and that is how they were understood. The energy price bailout is intended to be strictly time-limited and that is how it was received.
As a rough calculation, take ten years at £45bn per year. That’s £450bn.
The energy package is a fixed amount (estimated, of course) of £150bn, to be spent over the next two years.
So, it looks like the tax cuts produce a fiscal hit about three times larger than the energy package.
You might object that ten years ahead is irrelevant: we’re trying to survive until next month, and next year. Tell that to an investor in 30-year ‘gilts’ (UK government bonds).
You might also point out that it feels like £45bn in a decade’s time must be worth less, in our calculation, than £45bn this year. You’d be on stronger ground with that one.
Discounting Government Spin
Let’s take a look. We need to work out the discount rate, and its impact over that period. What does that mean?
A helpful way of thinking about future worth is to look at inflation. If it’s running at 5 per cent per year, what’s worth £45bn this year is worth only £42.75bn next year, in today’s money. The year after that, it’s only £40.6125bn. And so on. If we perform such a calculation out to the indefinite future – or, anyway, a long time: let’s say 25 years – we can add up all the figures and get the present value (PV) of that revenue stream. Or, in this case, the tax giveaway.
You could do it with an ordinary pocket calculator and a piece of paper. But fortunately, there are dedicated PV calculators available at the click of an internet link, so you don’t have to bother.
With the discount rate at 5 per cent, the PV of £45bn is roughly £600bn.
At 8 per cent, the PV is approaching £500bn.
At 10 per cent, the PV is around £400bn.
Just to clarify: the higher the discount rate, the more sharply the PVs of future annual amounts are discounted, so the lower the total PV sum.
There’s plenty of discussion to be had about what is the correct discount rate to apply. The Treasury discount rate has often been around 3 per cent. Given the turbulent times we are experiencing, in the examples above I have chosen rather high numbers. They tend to flatter the government, by lowering the overall PV. But, as you can see, even at 8 per cent or 10 per cent, the PV is somewhere around £400bn or £500bn. Much higher than the energy package.
We could flip the calculation around. If the PV of the energy package is about £150bn (a bit less if you discount the value of the payments in year two, but let’s not bother with that detail), what size would annual payments spread over 25 years need to be, to result in that PV today? At a discount rate of 5 per cent, we would be looking at around £10bn per year, a quarter or so of the £45bn per year tax cuts.
It’s one thing for a government to spin; it’s another for it to lie.
As the New York editor of the Financial Times, Gillian Tett, said on Channel 4 News on 12 October, the government’s excuses for the market turmoil – blaming, among other things, a US Federal Reserve Bank interest rate rise on 22 September, but never their own obviously crass ineptitude – were “b*llocks” (which the subtitling system translated as “bullocks”).
One of the government failures in question was the deliberate exclusion of the Office for Budget Responsibility (OBR) from the budget process, leaving us all guessing about the true figures and the most convincing rationale for them. It isn’t that the OBR is infallible. But it has a hard-won reputation for impartiality, professionalism and transparency. We can see and understand their sources and methods, and that provides us – and, crucially, key financial market participants – with an excellent reference point for making our own calculations and assessments, which may or may not differ from the OBR’s.
Another, not unconnected, problem was the apparent Truss-Kwarteng failure to understand, or even to care, that for as long as we seek to attract investors to put hundreds of billions of pounds sterling into ‘gilts’, we need to behave in a way which provides such investors with confidence. This means demonstrating that we know what we’re doing, within the system as it currently operates. After all, by buying ‘gilts’ they are entrusting their money to the Bank of England, on long-term deposit. The purpose – from the UK government perspective – being to help to regulate the impact on our economy of the government’s taxing and spending actions.
We could potentially abandon that system, removing entirely this form of our government ‘borrowing’ in its own currency. A currency it can create, via the Bank of England, in any quantity it desires, at any time. By the touch of a computer key. By fiat, in fact; that is, one not backed by gold or some other commodity of limited availability. Like other main western economies, we have had a ‘fiat’ currency since 1971.
But such a step, even assuming it to be desirable in principle, would be major, and would require careful management over a period of time. And, crucially for the current discussion about weaponised lack of honesty in the presentation of the budget, the government has given no hint that it intends any such change.
Magic Growth Potion
Some government supporters still, touchingly, insist that they’ve been misunderstood. The market analysts and commentators haven’t taken proper account of the power of their Magic Growth Potion.
The ‘MGP’ has often been criticised by Thatcherites and their forerunners when invoked by Labour. “Growth will pay for [insert expensive policy]”.
At least Labour was reaching for something that we know, and have known for a century, is real: in a modern economy, government expenditure is a major part of gross domestic product (total, annual economic output of the country), and when spent wisely on key services and capital investment, is fundamental to economic growth. Done unwisely, or over-extravagantly, under the wrong economic conditions, it can produce excessive inflation and other serious problems.
The Trussonomics’ MGP – essentially a medley of favourite spells from the more esoteric back-catalogue of Friedmanite-Hayekian-Thatcherite Reaganomics wizarding tribute acts – is pure fantasy. Made up. Rubbish. We’re back to Gillian Tett’s pithy observation.
It’s easy to see, if you make (massively) heroic assumptions about future, real UK economic growth and the contribution of tax cuts to generating that, you’ll get a net positive impact on the public finances in ten years’ time. Or, going far deeper into La-La Land, a mere five years.
The trouble is, even if you’re right (you aren’t), no one who matters, such as the ‘gilts’ investors mentioned above, believes you. And even if I believe you, the MGP will take years to take effect. In the meantime, you’re in trouble. Unless someone bails you out. Who? Spoiler: it’s the same people who have taken fright and think your MGP is crackers.
And let’s not forget, we’re focused here on the misleading claims by the prime minister and the government that the financial hole created by the tax cuts is small compared to the supposedly ‘big’ part of the budget: the energy package. In fact, the suggestion is that the tax cuts will more than pay for themselves. So far, so unbelievable.
By contrast, there’s a genuinely powerful argument to be made that the energy package provides a huge, immediate benefit, because it prevents the imminent implosion of the UK’s £2,000bn-plus-per-year economy.
The prime minister and her allies could perhaps try putting that in their Magic Growth Potion pipe and smoking it.
It has become fashionable among the sans-culottes of the Brexitist revolutionary elite to attack “The Blob” which is holding back the vital, radical action required to save Great Britannia Unchained from declinist, suffocating, corporatist (woke, lefty, un-British …) orthodoxy.
First it was the Civil Service. Then the judges. And the academics. ‘North Londoners’ also started to feature strongly. The list became ever longer. Including Her (now His) Majesty’s Loyal Opposition: apparently the Labour Party was causing the problems by having been in government twelve years ago, and potentially being in government again in the near future.
Still, how many of us predicted that major participants in the financial markets, the US Treasury Secretary, the International Monetary Fund, the Institute for Fiscal Studies, countless other august economic analysts, and the most staid (sorry, folks) of financial journalists would be swept up in the snide, angry abuse dished out by a prime minister and her outriders and backers, as the fatal policy flaws visible from space in her programme led to chaos and (as yet, near) calamity?
If there is a ‘Blob’ causing damage to the country, it’s pretty clear where it really sits and who its really-very-odd-indeed members are. (Although far less clear who funds them).
Stop the Bullocks
The UK is genuinely in peril as a consequence of the 23 September budget. The prime minister, along with those supporting her, is directly responsible. Clearly, she – and they – must go.
In the meantime, however short that may be, here’s an open letter to them all:
On your way out, before turning off the lights, do the right thing. Ditch the tax cuts. And please, please, just stop talking such an endless load of old – as the Channel 4 subtitles had it the other day – bullocks.