Martin Wolf: Kwarteng is risking serious economic instability

The chancellor’s largesse raises large questions about debt sustainability

The UK, says Kwasi Kwarteng, chancellor of the exchequer, is now “at the beginning of a new era”. He is correct. It is new in his willingness to pour scorn on the past 12 years of Tory rule. It is new in the size of his gamble with economic stability. It is new in his promises for a transformation in the rate of economic growth. But the question is not whether this era is new. It is whether it will be an economic success, a failure or an outright calamity.

The chancellor has announced as his objective a “trend rate of growth of 2.5 per cent” a year over the medium term. According to the Office for Budget Responsibility’s forecasts last March, the work force should grow at some 0.5 per cent a year between the first quarter of this year and the first quarter of 2027. Between the first quarter of 2008 and first quarter of 2022, trend growth of output per worker was also 0.5 per cent a year. On the assumption that the government is not planning to open the floodgates on immigration, the target suggests that the growth of productivity must quadruple over the next five years.

The chancellor also stated that “our plan is to expand the supply side of the economy through tax incentives and reform”. Are the measures outlined in the speech likely to achieve any such transformation? The answer is “no”.

Kwarteng proposes, for example, an acceleration in approval of infrastructure projects. Over a long period that should speed growth a little. But it is inconceivable that the unapproved projects of today will be transforming the economy within just a few years.


The chancellor has also reversed tax increases introduced by his predecessor, Rishi Sunak. But, as Ian Mulheirn of the Tony Blair Institute notes: “It’s hard to see how returning the tax system broadly to where it was in 2021 is now going to stimulate long-term growth.”

Kwarteng also decided to cut the top rate of income tax back to 40 per cent from 45 per cent. Is there any reason to suppose that this will release waves of entrepreneurship? Under Thatcher, the top rate was slashed from 80 per cent to 40 per cent. It is debatable whether even that improved performance significantly. This mouse of a change surely cannot do so. That is even truer of the cut in the basic rate from 20 per cent to 19 per cent. For economic performance, these changes are totemic, not real. For income distribution, however, they will be perfectly real, not totemic.

If the supply side promises are a fantasy, the fiscal and economic risks are not. The permanent tax cuts amount to close to two per cent of gross domestic product. According to Paul Johnson of the Institute for Fiscal Studies, the chancellor announced “the biggest package of tax cuts in 50 years without even a semblance of an effort to make the public finance numbers add up”. To this must be added an emergency energy package set to cost £60bn in just half a year.

Especially at a time of rising interest rates, such largesse is sure to raise questions about debt sustainability. Indeed, the market is already asking them. How might the government respond? Presumably by slashing spending. We have no indication of where and how.

Furthermore, this huge increase in the fiscal deficit occurs in a country that ran a current account deficit of 8.3 per cent of GDP in the second quarter of 2022 and has a tumbling exchange rate, low unemployment and already high inflation. Who could seriously regard this huge fiscal loosening as responsible? The Bank of England will be forced to tighten sharply. The government might then pour blame upon it for the results of its own decisions.

In sum, this mini-Budget will do nigh on nothing to raise medium-term growth, but risks serious macroeconomic instability. The failure to ask the Office for Budget Responsibility to assess its impact is simply scandalous. This government may be indifferent to painful reality. But reality usually wins in the end. – Copyright The Financial Times Limited 2022