Student Benjamin Van Broeckhuijsen wrote about the Chancellor of the Exchequer's mini-budget, its unpopularity and its effects for graduates and young people, days before his abrupt departure in Kent's student newspaper Inquire.
On the 23rd of September, Chancellor Kwasi Kwarteng announced the ‘Growth Plan 2022’, a ‘mini-budget’ calling for expansion of the supply side of the country’s economy “through tax incentives and reform”. In essence, supply-side economics is a theory that argues low taxation and deregulation of the financial markets lead to economic growth. Following her narrow win in the Conservative leadership election, Truss, aided by Kwarteng, aims to put growth at the forefront of this government’s agenda, “even where that means taking difficult decisions”. This ‘Trussonomics’ approach has been met with fierce criticism from both sides of the political spectrum, with Labour leader Keir Starmer calling the mini-budget “the worst unforced economic policy error of my lifetime” and senior Tory MP’s such as Damian Green arguing they would lose the next election if it did not change.
The effect on graduates is substantial, with them becoming the top taxpayers in the country. As Alice Thomson at The Times points out, graduates earning £50,000 a year will be paying a marginal tax rate (comprising of income tax, national insurance and student loan repayments) of 51%. Graduates earning £28,000 a year will pay a marginal tax rate of 40%. This development comes at a time where 28% of 21-35 year olds still live at home, and the average rent for London tenancies is £1,832 — according to SimplyBusiness.com.
The Growth Plan established several controversial policies such as the abolition of the 45% additional income tax for those earning more than £150,000 (the 45p rate cut), a scrap on the cap for bankers’ bonuses, the cancelling of the planned increase in corporation tax from 19% to 25%, and a cut on stamp duty tax. Coinciding with the mini-budget, Truss’s government seems to be wavering on whether it will stick to a pledge made earlier this year to increase benefits in line with inflation. Experts argue this would amount to pandering to the top 5%, ignoring the increasing financial hardship for the lower classes . Former Home Secretary Priti Patel told an audience at the Conservative Party Conference that the government was “spending today with no thought for tomorrow”. Following heavy political backlash, Truss and Kwarteng took a U-turn at the Conference and announced that the 45p rate cut would be scrapped from the budget. Prior to this U-turn, The Bank of England was forced to intervene on the 28th of September, arguing that if the volatility of the market were to continue or worsen, “there would be material risk to UK financial stability”. Since the U-turn on the scrap of the 45p rate cut, markets have stabilised somewhat, with the Pound bouncing back from hitting a record low against the Dollar on the 26th. Nonetheless, many of the divisive economic policies are still on course to be implemented, with largely negative effects on the British people — except for those at the very top of the income pyramid.
The cut in stamp duty is an example of a policy which is intended to provide those buying homes with fewer financial burdens. As a result of the Growth Plan, the cut-off points for those who must pay stamp duty (a flat tax paid by homebuyers, based on the value of that property) on a new property has risen from £300,000 to £425,000. This means that for homes valued at between £425,001 and £625,000, a first-time buyer pays 5% of the property’s value in stamp duty tax upon purchase. As explained by the Home Owners Alliance: for a first-time buyer purchasing a property worth £500,000, the new stamp duty is £3,750, which is 5% of the £75,000 beyond the £425,000 cut-off for stamp duty
This measure was intended by the government to aid buyers in an increasingly unstable housing market. However, many have pointed out the net-negative effect on more relevant figures like rising interest rates. Correspondents at the Financial Times argue this financial benefit is essentially worthless following the panic the mini-budget has caused among financial analysts and the markets. The Bank of England has announced that it would not hesitate to further hike up interest rates as it already did in September (it currently sits at 2.25%). Initially, financial analysts expected the financial frenzy in the City of London to lead to a raise in interest rates to 6% by next year, but this number has since fallen to a prediction of between 5.5% and 5.75%. Seeing as interest rates affect how much banks charge to loan money, open credit card accounts and provide mortgages, this poses a profoundly negative prospect for graduates’ ability to purchase homes. As shadow Chancellor Rachel Reeves pointed out: “the last time the government changed stamp duty, the main benefactors were those buying second homes, third homes and buy-to-let properties”. Speaking on BBC’s Question Time, a young first-time buyer told the story of her mortgage offer with an interest rate of 4.5% having been pulled off the table and replaced with one that could get as high as 10.5%, effectively rendering her unable to purchase a home.
While the scrap of the planned rise in corporation tax is estimated to put £19bn a year back into the economy, an attempt at ensuring steady investment in small businesses and entrepreneurship through financial leniency in the City has been criticised for amounting to a modern-day form of trickle-down economics. The shadow chancellor has brushed off the possibility for trickle-down economics being able to deliver 2.5% growth of the national economy, maintaining “it has failed before and it will fail again”.
Jo Michell, Associate Professor of Economics at UWE Bristol, claimed in an LBC broadcast on the 3rd of October that the political goal of this mini-budget is essentially to create a sugar-rush in the UK economy, making the Tories more electorally viable in the next election. The Resolution Foundation thinktank has said that the decision to keep the 45% top rate of income tax means the richest 10% of the UK has lost some of the gains they were set to make, but that the richest households will still gain almost 40 times more from this mini-budget than poorer families. Put into numbers, “the top 5% of households are still set to gain £3,500 on average next year from the remaining tax cuts, compared to just £90 on average for the poorest fifth of households”.
The political fallout of the mini-budget has eaten away at the slim majority that Truss won in the Conservative leadership, eroding her mandate to govern. Home Secretary Suella Braverman has called the pressure for Truss to drop the 45p rate cut a “coup” within the party. At the time of writing, Labour has a 25-point lead over the Conservatives in the polls and a 40-point lead over the Conservatives in the Red Wall, a traditional working-class heartland in which many constituencies had switched from Labour to Conservative in last general election. Following the Growth Plan, Liz Truss’s approval rating (-33) is lower than Boris Johnson’s lowest ever approval rating (-31), signifying that if the Tories do not find a way out of this freefall quickly, they will crash.