Growth Plan mini-budget: The 'Hail Mary' budget delivered on hope and a prayer

In cutting income tax and pushing head-first towards a deregulated, low tax economy, Liz Truss has bet the house and her Government’s future on the hope large sums of borrowing and unsustainable increases to government debt will lead to growth.

That’s the view of Paul Johnson, the director of the Institute of Fiscal Studies (IFS), the UK’s leading economics research institute.

Chancellor Kwasi Kwarteng’s mini-budget is also the clearest indicator of the new Prime Minister’s desperation to separate herself and her new Government from what she believes are the mistakes of the past, all while hoping growth will save the day ahead of the next general election.

The ‘fiscal event’ also poses one of the biggest political and fiscal challenges to the SNP Government since the devolution of income tax after the independence referendum in 2014.

Income Tax

The Chancellor announced the abolition of the 45 per cent top rate of income tax, alongside confirmation of a penny cut in the basic income tax rate to 19p in April.

With income tax powers devolved in Scotland, this has the biggest impact on the Scottish Government budget.

Within the infinite complexities of the fiscal framework, not following such a tax cut will see Holyrood’s budget increase through a smaller reduction in the block grant than expected.

Chancellor of the Exchequer Kwasi Kwarteng leaves 11 Downing Street to make his way to the Treasury Department to deliver his mini-budget.

Don’t expect the Scottish Government to follow the Treasury and scrap their own, 46 per cent, top rate tax band.

What is more likely is a tax cut for the lowest earners who pay tax, those who fall into the starter (19p), basic (20p) and intermediate (21p) income tax bands.

Deciding to keep tax as it is in Scotland would see almost all Scottish taxpayers pay more than they would in England, with those earning £29,000 paying an extra £160 and a £50,000 income paying £2,000 more.

Cutting the starter, basic and intermediate bands by a penny would cost £400m, but would also allow the Scottish Government to continue claiming the lowest income half of Scottish taxpayers pay less tax than in the rest of the United Kingdom.

Just cutting the starter and basic rates would cost the government around £250m.

Given the already significant budgetary pressures, John Swinney and Kate Forbes will be faced with a key juggling act between political demands for tax cuts and balancing the books.

Fairness through redistribution no more

One of the most startling statistics following the budget came from Torsten Bell of the Resolution Foundation.

He said half of the gains from the tax cuts announced for next year go to the richest 5 per cent of households, with the poorest half receiving an average of £230 versus £3,090 for the richest fifth.

The abolition of the 45p rate provides £10,000 on average to Britain’s 629,000 highest earners, the Treasury have said.

IFS director Paul Johnson said only those earning more than £155,000 per year will “win”, with anyone earning below that figure losing.

In essence, this is the death of fairness through redistribution. Trickle-down economics is back and in full-flow.

Stamp duty

Land and Building Transaction Tax (LBTT) is Scotland’s version of stamp duty, meaning the cuts announced by the Chancellor will not be replicated immediately.

The changes do mean if there are no changes, all property transactions will face higher taxation than in England.

Stamp duty cuts will also generate an additional £80m in the block grant, which could then be used by the Scottish Government to cut LBTT rates.

Alcohol duty

In a boost for one of Scotland’s strongest exports, alcohol duty will be frozen for another year.

This, the Scotch Whisky Association said, would save customers £1.35 on the average priced bottle of whisky.

With the SNP membership considering a whisky levy of its own, an issue that could come up at the party’s conference next month, this is another area to watch closely.

Investment zones

These ‘freeports for cities’ include plans for tax cuts and liberalised planning rules such as waived stamp duty or no business rates.

Their effectiveness is “based more on hope than on empirical evidence”, states the Fraser of Allander Institute.

In Scotland, they are likely to be the source of another tension between the UK and Scottish governments.

The Treasury has said it will work with devolved administrations to see them implemented, but will the Scottish Government play ball as it did, to an extent, on freeports?

There are also questions about the costs of such zones to the Scottish Government, in the form of business rates relief, stamp duty, and NICs reliefs, would be distributed.

Given the existence of Tory-led councils and many local authorities’ desire to boost their own region, relations between councils, umbrella body Cosla and ministers may sour further.

Independence

It is possible this budget will help the SNP in making their case for Scottish independence.

An Ipsos survey earlier this year showed the most convincing argument in favour of independence was that Scotland wanted to go in a different political direction than the rest of the United Kingdom.

Nothing underlines this more than tax cuts for the rich in England, and retaining higher tax levels in Scotland.

The strength of that move is partially dependent on the reaction of UK Labour.

If Labour are making the same arguments as the SNP, that the approach is unfair, reckless and robs the poor to fund the rich, retaining higher tax levels is not as powerful a political statement, especially when twinned with ‘only we can boot out the Tories’.

Lack of OBR forecast

The decision not to publish the Office of Budget Responsibility’s forecast or its independent analysis of the ‘fiscal event’ significantly undermines the Chancellor’s statement.

It is this which makes the budget appear as one driven by hope and blind faith in an ideological approach to the economy, rather than being underpinned by scrutiny and analysis from independent sources.

The lack of anything on the day of the mini-budget from the OBR is “irresponsible”, in the words of the Institute for Government and the Fraser of Allander Institute.

Truss’ gamble

This mini-budget does two things for the newly elected Prime Minister.

First, the Government will hope it moves what is often referred to as the ‘Overton Window’, understood as the spectrum of political views that are deemed acceptable to the mainstream population, getting ‘Trussonomics’ firmly on the front pages as an acceptable, even potentially desirable approach to the economy.

Secondly, Liz Truss has inherited a government which, under Boris Johnson, was floundering in the polls and at Westminster.

However incredible, she will hope that this budget plants the idea of her government being a brand new administration without policy links to the last decade of Conservative government.

If that is successful, don’t bet against a Truss victory at the next election if she manages to spur short-term growth and a bounce in the polls.

It is also the boldest attempt at pushing through big tax-cutting economic theory into reality.

However, the Fraser of Allander Institute says the “hope that these will stimulate the economy is based more on blind faith than on any tangible evidence”

Kwasi Kwarteng summed up his government’s gamble in one sentence; it is “a new approach for a new era” and one the Truss government cannot see fail.

All episodes of the brand new limited series podcast, How to be an independent country: Scotland’s Choices, are out now.

It is available wherever you get your podcasts, including Apple Podcasts and Spotify.