Counting the cost of tax cuts, bailouts and queues

Top of the Charts

Afternoon all,

I hope you’re all holding it together amidst a truly chaotic week. Appreciate it’s hard to keep up and you’re probably already saturated with reading things about the madness, so we’re aiming to provide some light relief with reads that don’t cover floundering pension funds or rising interest rates (though this is a good explainer on the pensions nightmare).

Those of you disappointed can check out COTW and the new analysis we’ve published on where this is heading (short answer: big spending cuts). Yesterday’s event discussing it, featuring Stephanie Flanders and Robert Colvile, is also worth a watch.

One day things will be calm again, some sleep will be had, and our WhatsApps won’t be full of friends panicking about their mortgages. But today is not that day.

Have a good weekend all.

Chief Executive
Resolution Foundation

Relieving trauma. No idea what made me think of it, but you might enjoy checking out the national archives’ curated section of Cabinet papers on the 1970s IMF crisis when the UK hit a sudden stop in funding markets (we used to think it was good to try and avoid these). If nothing else it’ll give you an appreciation of the fact that it’s not much fun running the country during an economic crisis – basically every option is a bad option.

Naughty non-doms. Since the taxes of those at the top are up in lights, have a read of a new, topical note on taxing non-doms (those resident in the UK but with a link to another country, usually because they were born abroad). In particular the research sheds light on the key question that bedevils debates about tax changes affecting the globally connected rich: how much will they react to a tax rise by leaving the country. Not so much is the answer provided by a careful examination of reforms to the non-dom rules in 2017 that removed the right to having your overseas income untaxed from long-stayers in the UK. This is a big deal – the authors use it to estimate that removing all preferential tax treatment from non-doms would raise £3.2bn, rather than seeing tax revenues fall as many have claimed.

Questioning Queues. Remember before market madness all anyone could talk about was The Queue (which peaked at over 24 hours and 6 miles long)? I didn’t queue – the kids showed absolutely no interest. But it provided FT journos with a novel opportunity to test how much people value their time. It’s paywalled but I’ll risk bringing you the headlines: in the middle of the queue, people would have typically accepted £180 to give up their spot/start the queue again. Given they’d done around 7 hours by that point we’re talking £26/hour. Those just about to enter Westminster Hall to see the Queen all basically wouldn’t accept any price – which is what sore feet will do for you. Meanwhile those right by the start of it (Bermondsey) actually demanded more cash (£500) to start again than those halfway in. Which makes no economic sense… but then I’ve heard rumours that queuing wasn’t about being economically rational in the first place.

Ideological Italians. This week Giorgia Meloni, leader of far right Brothers of Italy party, topped Italy’s election results – a big shift for a country that gave little space post-WW2 to far right parties, having experienced a fascist regime between the wars. For some background check-out research on the role historical resistance to fascism plays in contemporary voting. We already know that parts of Germany with a strong Nazi membership are more likely to vote for the far right today, but this work shows a lasting negative link between historic anti-facist activity and far right voting today: an extra opponent of fascism per 10,000 people in a province under Mussolini (as recorded by the state body tracking dissidents) reduced the vote share of the far right party in 1976 by 13 per cent. But note, the populist turn taken recently by far-right parties like Meloni’s is reducing the role of ideology – and potentially history – in limiting their vote share.

Trickle trouble. Top tax cuts will definitely raise inequality, as even the IMF noted this week. But they’ll also boost growth/employment and benefit everyone, is the counter from Liz Truss. Not really is the counter-counter, from a 2019 paper investigating exactly this question. Its USP is to examine not just the impact of tax cuts in general, but that of tax changes for different income groups. Tax cuts can boost economic activity, but mainly do so when they benefit those on low-to-middle incomes. Trickle down tax cuts focused on the top 10 per cent have a weak to negligible impact – the author estimates a 1 percent of GDP tax cut for the bottom 90 percent gets you a 3.4 percentage points of employment growth over a 2-year period vs 0.2 percentage points for the same size tax cut for the top 10 per cent. So, the impact of tax cuts for the top really is a trickle.

Chart of the Week

Last Friday the Chancellor blew the budget with £45 billion of tax cuts. This week markets, unsurprisingly asked how it was going to be paid for. The result? The Chancellor has until 23rd November to make the numbers add up. Much lower taxes mean less public spending eventually, so spending cuts are coming. And it looks like the first cut on the table is to working-age benefits – which may be uprated in line with earnings rather than prices in April, as the former is forecast to be considerably lower than the latter (5.5 per cent vs 10 per cent). That saves the Treasury around £5bn a year permanently, but at very considerable cost to those on low-and-middle incomes: a typical working family on Universal Credit with two children loses over £500 a year. Of course, it’s tax cuts that disproportionately benefit the top that makes this necessary (worth £55,000 for someone earing £1 million next year). As COTW shows, if this benefit cut is what happens then the package confirmed last week, and its consequences, will boost the the incomes of the richest five per cent by 5.5 per cent (or £9,200) on average, while cutting those of the poorest fifth by 2 per cent (or £300) in cash terms) in 2022-23. This is permanently cutting benefits for the bottom to fund tax cuts for the top, in the most unequal large country in Europe. You couldn’t make it up.