One of the top contenders for the daftest and least popular idea in Kwasi Kwarteng’s mini budget is the decision to cut stamp duty on house purchases. The government is claiming that it is doing this to help house buyers and that this will help to drive growth. In actuality it will make life harder for house buyers. The first impact of cutting stamp duty is that, other things being equal, house prices will rise by almost exactly as much as the tax cut. Buyers are most unlikely to gain, but sellers will be able to ask for more than they would otherwise expect to receive.
Then there is the significant problem that neither this tax cut nor any of the others has been financed and so it will be covered by increased government debt. That makes an increase in interest rates and therefore mortgages virtually inevitable. An increase in mortgage rates is the last thing that any prospective first-time buyer wants to see. The promise of extra help with stamp duty will soon disappear in the reality of horribly larger interest payments for all borrowers.
Rewarding bankers with bigger bonuses
Consider also the bizarre idea that growth can be injected into the economy by giving investment bankers bigger bonuses. Anyone with a memory that goes back as far as the dim and distant days of 2007 and 2008 will be able to recall that one of the prime causes of that crash was that investment bankers were allowed to gamble with other people’s money. When their bets worked out they collected huge bonuses. When they didn’t the rest of society suffered.
Northern Rock collapsed and queues of people formed as they desperately tried to get their money back. Lehman Brothers collapsed wiping out a $639bn company. The eventual economic cost was calculated at $3tn. The chaos was followed by ten years of bitter austerity in which the government took on much of the debt that the finance sector had recklessly built up in pursuit of those bonuses. It is extraordinarily unlikely that our country will get out of this crisis by rewarding and enabling the very people who caused the last one. Or by incentivising them to make such very expensive mistakes.
Borrowing to finance growth is a risky business
Worst of all in my own opinion are the choices which this government is making in its dash for growth. Spending a lot more money than the nation earns is a very risky business. It only works if the money is spent on investment and good choices are made about what to invest in.
Any wise government would be investing in the most widely predicted growth sectors: the knowledge economy, creative industries, health care, low carbon technologies, and trade with our biggest neighbouring markets. Locking the country into dependence on increasingly outdated fossilised technology in a desperate attempt to justify leaving the EU is a very strange way of driving forward positive change.
Kwarteng’s unfunded tax cuts
I say worst of all, but there is perhaps one worse choice: unfunded tax cuts. This government came to power by preaching the importance of austerity and the vital imperative of being responsible about the size of the national debt. It has now decided that being irresponsible is more fun. Especially if you earn over £150,000 and benefit from a huge tax cut along with massive subsidies on the energy bill for your large house.
It is well known amongst economists and politicians that governments which spend more than they earn at the wrong time in the economic cycle end up in trouble. I have, for instance, recently been reading a book by five widely quoted figures. It tells me that:
- “If you run up unsustainable debts then eventually people will stop lending you money.” (p21)
- “It should be obvious that pledges to spend more on public services, not raise taxes and maintain public services, form an impossible triangle.” (p29)
- “A spendthrift government will soon discover that it is a lot easier to hand out goodies than it is to take them back.” (p23)
You might like to know the authors of this book. They are Kwasi Kwarteng, Priti Patel, Dominic Raab, Chris Skidmore and Elizabeth Truss. They called their book Britannia Unchained.
I can’t say I recommend it as a serious analysis of Britain’s problems. But as a damning criticism of the recklessness of their own policies it has no equal.