At the end of an historic week at Westminster, here are some highlights, with comment.
Prime minister Liz Truss resigned on October 20th. In a brief statement, she said that she had “set out a vision for a low tax, high growth economy – that would take advantage of the freedoms of Brexit. I recognise though, given the situation {war in Ukraine, energy crisis etc], I cannot deliver the mandate on which I was elected by the Conservative Party”.
Truss’ statement recognises – not for the first time – that her mandate was from the Conservative Party, rather than the country. Her reference to taking advantage of Brexit freedoms merits further exploration.
All of the headline measures that “spooked the markets”, relating to energy support and tax cuts and changes, could just as easily have been done while inside the EU. Similarly, many regulatory changes, such as responsibility for IR35 status that frustrated those worried about compliance. Newspapers had been briefed that business secretary Jacob Rees-Mogg’s proposal to scrap the Working Time Directive, along with other reforms, had been rejected by Number 10 as “half-baked and unworkable”.
It is unclear whether the new Investment Zones would breach EU laws, as details are to follow. They may be similar to the new freeports, which are allowed.
Growth Plan measures that would not have been possible were the UK still in the EU include lifting restrictions on bankers’ bonuses and raising the maximum employee count at a medium-sized company from fewer than 250 to fewer than 500, for new regulations and business support schemes. In his speech announcing the Growth Plan, then-chancellor Kwasi Kwarteng had made no mention of Brexit.
The sacking/resignation of home secretary Suella Braverman on October 17th highlighted a key issue related to Brexit. Truss had wanted a migration policy that would allow many more workers to come to the UK than did Braverman, it is reported, exposing a disagreement on a key issue linked to Brexit. Many firms have now structured recruitment processes to take people from further afield than Europe, and want to bring in a broader spread of workers than is currently allowed.
Meanwhile, uncertainty within government, pending the selection of a new PM, means policy statements are likely to be delayed.
Hunt’s statement on the 17th
On Monday October 17th, Jeremy Hunt – the fourth chancellor in as many months – had scrapped much of the Growth Plan, including its two-year energy-bill support for households, reduced to six months. He re-instated the 25% corporation tax rate from next April and the 45% income tax rate. He also announced a Treasury review of energy support, mirroring a review under way at BEIS, where secretary of state Jacob Rees-Mogg has made energy the department’s dominant focus. BEIS has suspended work on workplace skills, for example, and moved staff onto energy issues.
Taken together, Hunt’s changes from the Growth Plan are estimated to be worth around £32 billion a year to HM Treasury but he warned of eye-wateringly difficult decisions ahead. The Institute for Fiscal Studies says that still leaves a black hole of £30 billion a year, Labour’s Dame Angela Eagle noted.
The aim of Hunt’s statement on the 17th had been to “ensure economic stability and to provide confidence in the government’s commitment to fiscal discipline”.
He announced that he would set up an economic advisory council. Members of that council announced so far include Rupert Harrison, economist at Blackrock, former head boy at Eton and chief of staff to George Osborne at the Treasury for five years.
Osborne has said that his biggest mistake during those years was to cut capital spending so hard. It will be interesting to see what decision Hunt makes in that regard, as government departs are expected to be told to make savings – even though they are just six months into a three-year spending settlement. Energy spending seems most likely to be maintained but there may be questions over other areas, such as transport. But public investment projects will be key to keeping many firms working.
Shared view with Labour?
In questions after his statement, Hunt identified some unity between his and Labour’s approach. In response to shadow chancellor Rachel Reeves, who had attacked the government and trickledown economics, he said he had listened carefully to what she had said and concluded: “I do not think the honourable Lady disagreed with a single one of the decisions I announced to Parliament, and that is important for the country and markets to know.”
In replies to questions from backbenchers, Hunt batted away all attempts to draw specific commitments, beyond what he had said in his statement.
On skills, Hunt told Robert Halfon, Conservative chair of the Commons’ education and skills committee: “I do not think we will solve the growth paradox of this country, raising our long-term rate of economic growth to 2.5% from under 1%, unless we tackle the skills issue—that is central. I do not promise that I can give him an entire solution to that in two weeks’ time, but it is something I would very much like to talk to him more about.”
Dame Margaret Hodge noted that Hunt had not mentioned Investment Zones (IZs). She said: “We have great evidence all over the place about how, as a mechanism for encouraging growth, jobs and prosperity, that has failed from the Thatcher years onward. All that happens is that they are incredibly expensive, we lose income from them, they only lead to the transfer of jobs from one poor area to another, and they are a massive opportunity for every kleptocrat, oligarch and criminal to launder money into the UK. Will the Chancellor abandon that policy, too?” she asked.
Hunt replied: “I totally support the benefits that investment zones can bring, but we will implement that policy in a way that learns the lessons of when similar models have been tried in the past and we will make sure they are successful.”
Earlier in the day, Levelling Up secretary Simon Clarke had clashed with Lisa Nandy, who complained that he could not say what contribution IZs would make to growth by the end of 2024. Clarke had said they would be “transformational”.
A day later, the Financial Times reported that the Treasury was working to reduce the scope and cost of the new Investment Zones (IZs), much to the dismay of bidding local authorities. It was hard to see how they could be justified and there was an expectation that they would be quietly killed, it quoted one source as saying.
IZs may already have caused some companies to pause investment plans, to allow them to consider whether IZs would be relevant to them. Insofar as they are similar to freeports, the OBR may take a similar view of them. It has said that freeports would add little, net to the UK economy.
Next steps
Hunt is to present a full medium-term fiscal plan to the Commons on October 31st, with assessments from the Office of Budget Responsibility. This will be a follow-up to the statement on the 17th. In view of the resignation of Liz Truss, it is unclear as to whether Hunt’s position will be supported by the next PM or we will see further change. Hunt himself is not standing and he has said he wants to remain as chancellor.
Links: October 17th Economic debate, Hansard https://hansard.parliament.uk/Commons/2022-10-17/debates/68F2BACA-D0F2-4F1C-8A65-8D29D304B6BA/EconomicUpdate
Government announcement: Chancellor brings forward further Medium-Term Fiscal Plan measures – GOV.UK (www.gov.uk)