Home: Analysis

Why Truss and Kwarteng’s tax cuts for the rich will lower growth

Even when measured against the government’s own aims, these tax cuts are likely to fail

Jeevun Sandher
Jeevun Sandher
23 September 2022, 11.42am

Chancellor Kwasi Kwarteng leaves 11 Downing Street for to the Treasury to deliver his mini-budget

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PA Images / Alamy Stock Photo

Liz Truss claims that she is cutting taxes in today’s mini-budget because it will boost economic growth. It’s nonsense, fairytale economics.

These tax cuts will only lead to the rich getting richer and the rest of us getting poorer, creating a more unequal society as well as a less healthy and productive workforce.

Across the world we can see countries with higher taxes on the rich that are more prosperous than ours. Sweden’s top tax rate is 57% (ours is 45%) yet the country produces 17% more per person than we do. If we really want to see our economy grow, we need to get cash in families’ pockets and invest in people and places.

Today’s shocking income and National Insurance cuts, announced by the chancellor Kwasi Kwarteng, will give the richest 5% over £8,500 annually, while only giving the average family around £400. That understates the benefit to the rich because it doesn’t include the effect of today’s corporation tax cuts.

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Even if this does increase growth in the short term as the prime minister claims – and evidence suggests it won’t – we’ve seen that GDP going up doesn’t necessarily mean our wages get any higher, our families get any healthier, or that more of us can afford a house.

GDP growth gives us a limited view of how much more prosperity is being created. Firstly, it is only a measure of current economic output and does not include the wellbeing of a country’s population or reflect how environmentally sustainable growth is.

Secondly, a country’s GDP only shows us how much we are producing in total, and not who the gains of this production are flowing to. If economic growth goes solely to the rich, a larger economy will just mean more money in the pockets of the already wealthy.

But even when measured against this government’s own aims of delivering growth, these tax cuts will fail. They will lead to dramatically higher inequality as tax cuts that disproportionately benefit the rich don’t help the people who need it the most. This in turn reduces growth, because the rich tend to spend less and save more of their income as a proportion.

By contrast, those on low incomes spend a greater proportion of their income than the rich – because the cost of meeting their basic needs uses up the little money they have (or, in many cases, outstrips it, meaning parents go hungry to feed their children). More inequality, therefore, means less spending on goods, and less economic output, while the wealthy simply accumulate more savings in their bank accounts.

More unequal nations also see slower economic growth as they are less healthy. Those at the bottom and middle are left struggling under the stress of trying to make ends meet, making them less productive at work.

When you’re skipping meals so you can pay your energy bills, it’s much harder to sit down and read to your children

In addition, countries with higher inequality have less educated populations. Low-income parents who have to choose between heating their homes or putting food on the table have fewer material and psychological resources to invest in their kids. In other words, when you’re skipping meals so you can pay your energy bills, it’s much harder to sit down and read to your children or teach them the alphabet.

Higher inequality is generally associated with lower growth, as has been found by both the IMF and the OECD.

As the temperatures drop, millions of families around the country are facing a hard winter ahead. The government should prioritise protecting them, over tax cuts that disproportionately benefit the rich.

Around one in three families don’t have enough money to even meet the basic standard of living. Getting more cash in their pockets would lead to higher growth today – and better health and education outcomes in future.

Even better, if we were to also invest in a program of mass home insulation and decarbonisation, this government would be keeping our bills low, while protecting the UK from energy shocks and climate catastrophe in the future. It’s a win-win.

People are also in dire need of more investment. The amount we spend on adult skills has fallen by half since 2010 and spending per pupil is lower due to rising inflation. Add on the lost learning during the pandemic and the government’s refusal to properly invest in catch-up education, and you have a nation in urgent need of a skills upgrade.

The places we live in need investment too. While that does include physical infrastructure, especially outside London, we also need more social infrastructure. We should give communities the money they need and let them decide how best to improve the places they live in.

We face a choice in this country. We can ensure everyone has a warm home, the knowledge that they can afford life’s essentials, a clean and healthy environment, and the opportunity to thrive for generations to come.

Or we can continue transferring wealth from the majority to the rich, making our jobs, homes and futures less secure as well as accelerating environmental breakdown.

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