Even the government’s fans were lukewarm in their support. Crispin Odey, a Tory backer and founder of the hedge fund Odey Asset Management where Kwarteng once worked as an analyst, said: “They are trying the right things, but there has to be a risk we are going into a Barber boom, by pushing the button on inflation.”
That’s reference to the ill-fated 1972 budget drawn up by Kwarteng’s Tory predecessor Anthony Barber. Barber, like Kwarteng, delivered a massive package of unfunded tax cuts which, in his case, saw the economy overheat and inflation soar before collapsing into recession. Barber’s boss, Edward Heath, was defeated by the Labour opposition two years later, and the UK had to seek a bailout from the International Monetary Fund in 1976.
Truss similarly may have less than two years before she also has to call an election.
Truss has been clear that what matters to her is increasing the economic pie, rather than worrying about how it is divided.
That boldness is most evident in the central gamble at the heart of the mini-budget. Success hinges on a single number: Kwarteng’s 2.5% growth target, which is almost a whole percentage point above the official forecast for the next three years and a level last seen before the 2008 financial crisis.
If the government can lift GDP growth by a percentage point, the tax cuts will pay for themselves by the end of five years, according to the Treasury documents published on Friday. At that point, the government will have stabilized the national debt, fixed the UK’s productivity conundrum and given the country the competitive advantage of lower taxes.
Martin Weale, a former Bank of England rate setter now at King’s College London, described the growth target as “pie in the sky.” The government can’t be sure it will get 2.5% growth, but it can be sure that the tax cuts put the public finances in a perilous position, he said.
The Resolution Foundation projected that government borrowing as a share of GDP will rise for the net five years, adding a total of £411 billion to the existing £2.3 trillion debt pile.
At the same time, the benefits of the tax cuts are skewed towards the highest earners -- who traditionally are more likely to vote Conservative. Someone earning £200,000 will be £5,220 a year better off as a result of the tax cuts, while a worker on £20,000 will gain just £157.
“After 12 years of running the country, the Tories desperately need to establish a record of delivery quickly if they want to cling on to power,” said Ryan Shorthouse, chief executive of the Bright Blue think tank. “The prime minister and chancellor are going for broke.”
--With assistance from Emily Ashton, Joe Mayes, Libby Cherry, Alex Morales and David Goodman.
This article was provided by Bloomberg News.