The new Chancellor Kwasi Kwarteng and his boss Liz Truss have “driven a juggernaut through the cross-party consensus about how to manage the British economy that has prevailed since the 1990s,” writes ITV’s Robert Peston. Kwarteng himself hailed a “new era” for the nation’s economy when delivering his “fiscal event” – a budget, by any other name – in the House of Commons this morning. What will his 40-page Growth Plan mean for London’s economy, for Londoners and for London’s relationship with the rest of the United Kingdom?
It seems to some to mark the end of “levelling up”, however that nebulous flagship of Boris Johnson’s administration is defined. Whether seen as an agenda for reducing inequality or raising the strength of the economies of the North and the Midlands to nearer that of the capital, Kwarteng’s measures might have been designed to do the opposite, at least initially.
In some ways, his approach favours London and some Londoners. In others, it does not. It was striking, given that few national Conservative or Labour politicians have praised London or acknowledging its crucial importance to the national economy in recent years, to hear Kwarteng say in his speech: “We need global banks to create jobs here, invest here, and pay taxes here in London, not Paris, not Frankfurt, not New York.” That was during a passage justifying removing the cap on bankers’ bonuses, which Kwarteng says will boost the capital’s financial services sector.
That view is, of course, contested, as is Kwarteng’s parallel conviction that cutting taxes will help the UK economy get bigger to the ultimate advantage of all – what opponents deride as “trickle down” economics.
“High tax rates damage Britain’s competitiveness,” he told the House, before announcing that the topmost income tax rate of 45% – which applies to annual incomes above £150,00 a year – will be abolished next spring leaving a single higher rate of 40%, affecting all people on over £50,270 a year. The government says getting rid of that “additional rate” will “cut tax for around 666,000 individuals from April”. A lot of those people live in London. Kwarteng contends that effectively giving them more disposable income will be good for us all in the long run.
His other big announcement about personal tax levels was that the basic rate of income tax will come down from 20% to 19% next April rather than in April 2024, which was his predecessor Rishi Sunak’s plan. Cuts in the basic rate are worth more to higher earners than to lower earners: “On average, basic rate taxpayers will be £130 better off and higher rate taxpayers will be £360 better off in 2023.24 thanks to the cut to the basic rate,” the government says.
On average, wages in London tend to be higher than elsewhere. Yet Paul Johnson of the Institute of Fiscal Studies says “despite today’s tax cuts middle earners are still set to lose as a result of tax changes over the years” because “the freezing of allowances and thresholds is still a big tax increase”. He concludes: “Only those on over £155,000 will pay less tax overall”.And, of course, although wages tend to be higher in London so living costs, especially housing.
How else might London and Londoners gain? Changes to stamp duty, which have come into immediate effect, will provide a bit of help to those trying to buy their first home: from now on they won’t have to pay any stamp duty – stamp duty land tax, to give it its full title – when buying a property up to £425,000 in value, a rise in the threshold from £300,000. After that, the rate varies from 5% to 12% of the value of the home above the threshold. But it’s a different story for Londoners who have mortgages already: as inflation keeps on rising, the Bank of England, having just raised interest rates sharply, might raise them still further in an attempt to damp it down.
Another “fiscal event” feature will please some London retailers and also represents a reversion from the anti-London “levelling up” mindset. As On London reported two years ago, the axing of VAT-free shopping for overseas visitors was justified under Johnson partly on the grounds that London was the main beneficiary.
Business groups in the capital are glad Kwarteng is restoring it, and the London Chamber of Commerce and Industry’s Richard Burge says many firms will “cheer the scrapping of next year’s planned rise of corporation tax, which we hope will incentivise firms to invest in their company and their people”.
He adds, however: “There is no doubt that many will question the government loosening laws around bankers’ bonuses while simultaneously providing minimal support to small businesses who need support the most. And UK Hospitality’s Kate Nicholls says: “A far more immediately impactful step would be to reduce VAT for our domestic customers. Without such measures – thousands of businesses and many more jobs will be lost.”
On infrastructure, Kwarteng said the planning system is “too slow and fragmented”, blaming the EU for this and promising to “streamline” things. However, Centre For London think tank director Nick Bowes has remarked that government changes of mind and reluctance to invest have been far bigger problems than planning regulations. Moreover, the Growth Plan’s list of infrastructure projects it aims to “accelerate” contains very little for the capital.
The Greater London Authority is on a list of areas said to be “interested” in attracting a low tax, low regulation “investment zone”, though what exactly that might mean is hard to say. Jack Brown has shown that you can’t build another Canary Wharf without lots of government cash and intervention.
And what about those Londoners who aren’t earning over £50,000 a year? There are an awful lot of them and very many are already struggling to cope. Those in work will have a little more to spend when the tax cuts come in, but why wasn’t much more done for them at this time of pressing need?
The answer appears to be that Truss and Kwarteng have no time for the economic arguments – let alone the moral ones – for giving the greatest help in testing times to those in greatest need of it, enhancing their spending power in the process. They have preferred instead to follow their belief that taking the country’s tax and regulatory structures to bits will allow wealth-creation to flow for the greater good of all
Peston writes: “Theirs, for better or worse, is the first UK government to properly face up to the logic of Brexit, which is that it was only worth doing if the economic governance of the country was to be radically changed.”
If it all comes crashing down, millions of Londoners could suffer. At the same time, with borrowing through the roof and the Chancellor, in the words of Paul Johnson, making not “even a semblance of an effort to make the public finance numbers add up”, the UK’s dependency on London seems unlikely to reduce.
What if the capital’s economy stalls rather than soars? What if its public services collapse? “Mr Kwarteng is not just gambling on a new strategy,” says Johnson, “he is betting the house.”
Updated 24 September 2022.
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