Liz Truss’s unfunded tax cuts announced on 23 September have caused turmoil, with a sharp devaluation of the pound, which exacerbates inflation, and rising interest rates. She may have now realised that attacking the Bank of England and “economic orthodoxy”, whilst side-lining the Office for Budget Responsibility, does not inspire the confidence of the financial markets.
The Bank of England has been forced to buy government debt in order to protect pension funds, but this has not prevented a significant increase in government borrowing costs.
The Institute for Fiscal Studies (IFS) estimates that Kwasi Kwarteng will need £60bn to fill the gap left by unfunded tax cuts. The IFS reckons that, at some point, today’s tax cuts will need to be paid for by future tax rises or spending cuts.
Some governments like cutting taxes before general elections, whilst delaying any required public spending cuts until after the vote. However, it now would appear that the public spending cuts may have to start sooner than expected.
There is already talk of cuts to benefits, which may not be allowed to increase in line with inflation unlike state pensions, but it is not clear whether there is a majority of Conservative MPs to allow this.
A cut in real terms
Furthermore, spending for public services is still based on the 2021 spending allocation that does not take into account the unexpected rise of inflation to 10% and more. Thus, schools and hospitals are already facing increases in costs that outstrip the more modest increase in funding: this is a cut in real terms.
Worse will follow.
Liz Truss’ plan for health and social care does not address the NHS fundamental problem, which is inadequate numbers of nurses and doctors: there are currently 132,000 vacant posts in the NHS and 165,000 in social care.
Conversely, Labour has made specific commitments to fund the required increase in the number of nurses and to double the number of medical students.
Only those with incomes over £155,000 would have benefitted from the tax changes announced since November 2021, everybody else is losing. This government has lifted the cap on bankers bonuses whilst offering pay rises in the public sector that are well below inflation.
This pay policy exacerbates the NHS crisis, with significant numbers of lower band NHS staff quitting for better paid jobs.
Nurses have announced an intention to ballot for strike. A similar decision has been taken by junior doctors, who have been offered a pay rise of 2% in a year when inflation is expected to peak at 11%.
The deterioration of the public services brought about by these tax cuts will affect disproportionately those on lower incomes.
When state schools fail, those who send children to private schools are not affected. When social care services fail only those who can pay for private social care are unscathed. When the NHS waiting lists get even longer, paying for private healthcare is an option only for the better off.
Levelling-up in reverse
In an article in the British Medical Journal (8 October), David Oliver has come to the conclusion that the much-trumpeted levelling-up agenda is already in reverse.
Even the term “health inequalities” is now being replaced by “health disparities”. The term disparity may falsely suggest that differences in life expectancy are just due to chance rather than being, at least in part, the consequence of policy decisions.
Government debt has increased in the past few years because of the Covid pandemic. We are now facing a recession accompanied by high inflation, which undermines living standards and erodes public services already compromised by the previous Conservative austerity.
There are also ongoing uncertainties regarding the war in Ukraine, with calls for increasing defence spending.
This is not the time for unfunded tax cuts or cuts to public services. Countries need good infrastructure and public services to thrive, as well as a well-educated healthy workforce. Growth is a return on good public spending.
Liz Truss has been criticised by all sides for her economic plans and has no better answer than pretending there is an imaginary anti-growth coalition. Some commentators have suggested that Liz Truss, with her misconceived policies, is the real threat to growth.