We have about the highest level of taxation we have had in the UK since the 1970s. In the 2021-2022 tax year tax receipts were 30.3% of GDP. In 2009-2010 they were 25% of GDP which was the lowest level in the last 20 years and occurred under a Labour government.
The recently proposed tax changes are: cancel an increase in corporation tax; reverse a recent (unpopular with the left) 1.25% increase in national insurance contributions; cut basic rate of income tax by 1%; change stamp duty nil band from 125,000 to 250,000 (the average house price is 281,000); remove the 45% additional rate of income tax (paid by 629,000 people earning more than £150,000, to the tune of about £1.5bn (thanks to KJP for the correction)).
Such changes are welcome to me, but do not appear to be particularly radical.
And yet everyone, from the IMF to forex traders to buyers of government bonds to Torygraph columnists, not to mention literally everyone on Twitter, is completely freaking out about it.
Most commentators seem to be aghast at the very concept of tax cuts. Few commentators are talking about spending. Are these tax cuts really so big and costly, or is it that nobody believes that a smaller state can lead to economic growth, instead believing that government tax and spending is a zero sum game, and that anything other than a steady increase in tax and spending is terrifying?
Kwarteng is targeting the supply-side of the economy, as this will ultimately provide the cure for high inflation and the cost-of-living crisis, through unleashing the productive potential of the economy. Higher interest rates will raise the bar when it comes to making economic decisions and assessing the prospective return of a business investment, which in turn will concentrate activity in higher growth areas and improve GDP growth rates in the long run. Major reforms of planning laws, the introduction of new ‘enterprise zones’ and – in true Thatcherite tradition – a confrontation with troublesome unions are all on the cards, along with a major overhaul of EU-inspired red-tape.
This new government marks a major break with the past. Aside from a bit of tinkering here and there, the last three Prime Ministers were content to assimilate the Blairite tradition of managed decline. Years of so-called austerity have left us with a bloated state and taxation at its highest level since the 1950s as a share of GDP. This government has a radical approach to confronting and adapting to the economic challenges we now face. The transition will be painful. The major question is whether the government’s policies can begin to make an impact in advance of the next election in 2024. Turmoil in the markets would indicate that sentiment currently doubts it can.
The market reaction seems oddly co-ordinated and planned to me. Someone has probably made a killing shorting sterling, just as Soros did in the past. Why exactly would traders, many of whom will benefit from the abolition of the 45% tax rate, react so incredibly negatively to this mini-budget?
P.S. really glad to see a post about this here, I’ve been taken aback by the reaction to Kwarteng’s budget and wondered what folk at Samizdata would have to say about it.
What was very strange was the IMF – the IMF for godssake – deciding to add fuel to the flames by focussing its ‘economic criticism’ on the abolition of the top rate. Even on the most pessimistic calculation, this is almost immaterial in the scheme of Britain’s fiscal revenues, and there’s a good chance it may even result in a net gain in tax revenues. So their criticism was plainly NOT motivated by worries about the overall fiscal position or strategy. It was directly political. Strange days.
I’m no economist, nor do I have any delusions that I might be, but the reactions would seem to suggest that Kwasi is on the right track.
I well recall (40 years ago now!) the reactions to the first year or so of Thatcher. The butthurt of the left still hasn’t gone away. I should imagine that a portion at least of the current ire is related to that.
I think more talk about cuts was needed, and would probably have averted much of the bad market reaction. But yes, defo a strong element of deliberate/stoking it blob overreaction from the usual suspects (bbc, ft, economist, labour, etc).
Interesting as well how now even the prospect of a marginally higher BoE base rate is being discussed in terrified tones – what will it do the housing market! – as if rates should just stay close to zero for ever. Are we going to have pressure for a govt bailout of mortgage holders next?
I agree with your sentiments but I think that you have made a mistake over the number of people earning over £150,000. According to government figures it is 629,000; 6.1m would be 18% of income tax payers.
There are 5.5m paying 40% tax so the total above basic rate is roughly 6.1m. If those earning above £150,000 averaged £200,000 then lowering the top rate would cut their tax bill by £2,250. In total a reduction of £1.5 billion which is not much by government sums.
As to corporation tax it lowers both wages and dividends so there is a tax loss to be set against it.
I’d say that hardly anyone believes that a smaller state can lead to economic growth, and most of the few who do believe it consider economic growth to be a Bad Thing. As a comment on Instapundit put it a little while back: The Greens don’t really care about climate, they care about human prosperity (and by “care about” I mean “hate”).
Those of us who want smaller government for the sake of economic growth and human prosperity (among other things) are officially a tiny fringe minority with totally unacceptable views; extreme-right barbarian terrorists who want to destroy Civilization Itself.
In addition to this is the reversal of IR35 changes since 2017, which essentially wiped out the limited company contractor model of self-employment due to very high effective marginal tax rates.
I effectively retired because of the impact of this since the rates on offer within IR35 simply didn’t justify the costs, risk and effort. I doubt that I’m the only one, but I wasn’t expecting any action on this, so I remain surprised.
I’m guessing someone realized that a tax regime that was so punitive that people would rather sit at home and watch the cricket rather than be subject to it was essentially self defeating.
So, come April 6th 2023, I might start hunting for a new contract again. That would be nice.
KJP: “I think that you have made a mistake over the number of people earning over £150,000”
You are correct. I misread this: https://www.bbc.co.uk/news/business-61996117
Now fixed.
The enabling of big bonuses and the move to 40% will result in a greater tax take, so it isn’t a cut. If any of those who resent the changes have a problem with a higher income tax take they should express it, and if they don’t believe it will increase now is the time to go on record to see whether their judgment is better than that of this Lincolnshire housewife. The take in 1988 after the Lawson ‘cuts’ was more than in 1987 and 1989 was higher still.
Here is a good article from the CapX blog about the contradictions and the agenda of the IMF, and other “sensibles” that oppose the tax cuts:
Yesterday afternoon I attended a conference in London, and the keynote speaker was Chris Patten, now Chancellor of Oxford University, and a former Conservative minister during the days of Margaret Thatcher, and probably best known as being the last governor of Hong Kong. He made a good speech in some ways (he was surprisingly willing to pose the question that Covid was from a lab, and that China has been dishonest about it), and also said nice things about the late Margaret Thatcher. He could not, however, resist claiming that the Liz Truss administration has no adults in it. (Unlike mature, sensible people such as he. He came across as patronising.) He claimed to be a “fiscal conservative”, arguing that the Thatcher government actually tightened the screws on the economy, and raised taxes, before cutting them.
I thought this was a bit rich from Patten. A famous “wet” who disliked the pro-free market rhetoric of Mrs Thatcher, it seemed a bit odd for Patten to play the austerity card at this point.
And indeed I find it more broadly bizarre to see people in the usual Establishment way to start going on about fiscal responsibility, when they were the same folk who denounced critics of lockdowns, called for massive furlough schemes, supported ever larger spending on the NHS. But their response to this is always that we can just tax the “rich” a bit more, ignoring certain basic facts such as how capital is mobile, and that there are not enough “rich” to go around. (That is even before we get to the sheer immorality of treating wealthy, successful people as just creatures to be milked.)
Kwarteng, the Chancellor, angers the “sensibles” and the declinists by posing the following point: We have tried your high-spend, high-tax approach, and what we have to show for it is an era of sluggish growth, which means ever-higher taxes, and slower growth, and so on. Meanwhile, we have an overhang of a decade-plus of quantitative easing, a zombified corporate sector addicted to cheap money and which is more interested in going “woke” and fucking around with ESG ideas rather than profits.
A whole set of people and their cozy assumptions got jolted last Friday, and Mr Kwarteng also jolted them by promising to scrap legacy EU legislation unless actively restored by parliament. Overall, it was an excellent statement; I guess Kwarteng can be faulted for not perhaps realising how febrile the markets are, and how much of the MSM would try and turn this into a problem.
Lots of Capitalists depend on Socialism for their capital…
RK: part of the reason for the increase in total revenue from Lawson’s 1988 income tax cuts was that the top rate of income tax came down from 60% to 40% at the same time as the tax rate for personal capital gains was aligned with the tax payer’s marginal income tax rate. That meant that top earners’ capital gains went from being taxed at 30% to being taxed at 40% and all the tax planning schemes for dressing up income as capital gains became obsolete. Politically, Lawson could afford to do that because personal CGT was fully indexed with a generous separate threshold. Unfortunately, Kwarteng is starting with CGT the way Brown left it: non-indexed but with taper relief.
I wonder when our debt will take its real toll? Taxation is the means by which governments take money from the economy to pay for their spending. Tax and spending have been seriously uncoupled. How about some focus on cutting spending to bring budgets into balance?
These institutions (IMF, Treasury civil servants, central banks) basically get a free pass from voters, despite years of crap predictions, bad policy – QE, negative rates, repeated bubble blowing etc. as far as the BoE is concerned, it does start to make me wonder if making it independent – hence, more unaccountable – was such a good decision.
AP, I was looking at a spreadsheet of all taxes by category and year maintained by the OECD. The income tax category was IIRC separate from the CGT. In fact the take in every category seems to have gone up at least in unadjusted terms every year I looked at. So there is such thing as an ‘unfunded’ cut in KK’s budget.
Here it is: https://stats.oecd.org/index.aspx?DataSetCode=REVGBR
Tell me if I’m wrong or have got the wrong end of the stick.
I think you may be referring to rent-seekers, not capitalists
RK: I think that you are right that income tax alone saw increased revenue (even with significantly above-inflation increases in the tax free band for all tax payers). That was why I took care to say part of the reason … total revenue. The substitutability of CG and income probably had some effect on the overall figures, but the effect of strong of domestic demand driven by credit liberalization was probably greater.
That 30.3% figure for the tax take seems frighteningly low. I know that government spending is 40% (I’ve even heard 45%). So how do we account for the difference? I looked at the link and I couldn’t see anything that was obviously missing (duties, tariffs perhaps?) If that is the case they can only be making up the difference with borrowing. Strewth!
Long dated government bond yields have gone up hugely since the budget last week, only coming down today after the Bank of England announced a mini-QE for a few weeks. I work in the financial sector and can confirm that virtually everybody – Sensibles to a Xe – blames the ‘irresponsible’ budget. I’m the sole dissenter. (For those interested the real cause of it is that yields have drifted up a lot over the year and this has led to leveraged investors, principally pension funds, to fire sale gilts to avoid a negative equity situation.)
These days people want tax cuts and a huge amount of government help.
Even so called Conservatives want plenty of government cash, for example if it means they don’t have to pay for their care home costs when they are old so they can leave a big inheritance to their children.
Doesn’t stop them moaning about others getting state cash though.
I was thinking this morning that there was a time not long ago when the markets would have been ecstatic about this. Now the appear to be aghast. Something has changed in the financial markets. Am I the only one to suspect that the change has something to do with who owns the traders?
I’m generalising but overall I don’t think ‘the City’ and Wall Street are conservative.Not anymore at least, if they ever really were.
Anyway, I thought Kemi would have made a better PM. I’m sure the press would be trying to destroy her as much as they are Truss, but Kemi seems to be a lot better at public speaking than Truss and more ardent at pushing culture war issues against liberals and leftists.
Rob Fisher…
For the first time in 150 years – taxes in the United Kingdom on business enterprises and individual businessmen will now be lower than in the major centres of the United States, and will be lower than our other major competitors.
That is rather radical – and the “international community” (i.e. the Saint-Simon style Credit Bubble bankers and Tech Totalitarians) will not forgive us for it.
Their “world governance” depends on things being, basically, the same in every major centre – and now they are NOT the same. The unofficial tax cartel has been broken.
However, GOVERNMENT SPENDING must now be cut – otherwise the policy will not work.
And by “work” I mean that the massive world economic crash being less bad in Britain than in other places – such as the United States.
It can be done – but government spending must be cut to do it.
There are examples of political leaders managing to cut government spending in a crash – not Herbert Hoover (he increased taxes and government spending – yes, the history books lie about President Hoover), but rather President Warren Harding (another President the history books lie about – but the lies are more personal).
The Governor of South Dakota (a smaller example) did this in the teeth of the New Deal ideology- in the late 1930s.
Sandwiched between those two was the best President the US has had in the last 100 years, a man who knew what the Constitution demanded of him, and what it wanted him to stay out of.
Socialism is for everyone specially those that have power to influence it. That including financial markets. Many in financial markets prefer an infinite line of credit from Government than fighting if the tax is 30% or 45% over their own money.
You also notice large corporations in Anglo-Saxon world ditching services to the citizens and making preference to government contracts and business to business deals. That means it is much more important for large corporations that Government has money than the money to remain in the citizens hands.
Yes Snag – President Calvin Coolidge was a good man and good President. His speeches, which he wrote himself, are well worth reading.
He was also the last President to be what the Founding Fathers would have considered to be an educated man – people such as Franklin Roosevelt and Jack Kennedy pretended to have Classical learning (allowing people to drop Classical references into their speeches – normally horribly out of context) – but Calvin Coolidge really was a man of Classical learning.
However, there was a great flaw – even then.
The Federal Reserve system had already been established – the National Banking Acts had been bad enough, giving absurd privileges to the New York banks. However, the Federal Reserve was vastly worse – exactly the wrong “lesson” had been learned from great banking busts such as that of 1907 – instead of ending Credit-Money expansion the idea was taken up (even by relatively conservative people) that the system had not been “flexible enough”, not too “flexible”. That the system should be more (yes – more) “flexible”.
The madness of the New York Federal Reserve under Benjamin Strong in the late 1920s was actually praised by the late Milton Friedman – as, by supporting the increase of Credit Money by the banks, Mr Strong “kept the price level stable”.
That this policy of Credit Money (to “keep the price level stable”) made the crash of 1929 inevitable, is not understood by the modern Chicago School (although the old Chicago School may have, partly, understood it) – on this Milton Friedman was as deluded as Keynes.
And, as far as I know, President Calvin Coolidge did not see the danger.
Rob Fisher – this was never about tax revenue. That is not what “the markets” (i.e. the handful of vast corporate players backed by the Central Banks) were concerned about.
They were concerned about the unofficial tax cartel – and it has been enforced today. The top rate of income tax will remain 45% in the United Kingdom – the same as in France.
There will be no great tax advantage for individuals in the United Kingdom over France, Germany and the major American centres.
World “governance” has been enforced.