Good morning. For a “mini” budget, today’s announcements by new chancellor Kwasi Kwarteng will have some pretty maxi consequences. At 9.30 this morning, Kwarteng will set out significant tax cuts, explain how he will pay for the energy price freeze and announce new “investment zones”. He will tell MPs that his plans will help break the “vicious cycle of stagnation”.
Coming the day after the Bank of England said the economy was in recession and put interest rates to their highest level since 2008, even as the pound fell to its lowest level against the dollar since 1985, all this is likely to have a more significant economic impact than many full-scale budgets of previous years – but the Treasury has refused to publish the Office for Budget Responsibility’s (OBR) analysis of exactly what their plans will mean.
In the absence of the OBR report, the Institute for Fiscal Studies (IFS) has done its own assessment – and it forecasts the proposals will reduce tax revenue by £30bn a year, increase borrowing by about double that, and leave an £18bn gap in public spending from previously announced figures.
In today’s newsletter, IFS economist Ben Zaranko explains those numbers – and what we do and don’t know about what Kwarteng will set out today. That’s after the headlines.
Five big stories
Ukraine | The first full day of Russia’s mobilisation produced emotional showdowns at draft centres and even signs of protest, as reports emerged claiming Russia could conscript far more than its stated 300,000 soldiers. Meanwhile, five Britons released from Russian captivity were reunited with their families.
Religion | Northern Ireland’s 2021 census has shown Catholics outnumber Protestants for the first time. While neither group have a majority, this is a landmark moment for a state that was a century ago supposed to have a permanent Protestant majority.
Fracking | Ministers face a furious backlash from Conservative MPs after overturning a manifesto pledge to pause fracking until it is proved safe, and then indicating drilling could be imposed without local support. The new energy secretary Jacob Rees-Mogg has dismissed worries about earthquakes as “hysteria”.
Diplomacy | Liz Truss has said she is considering relocating the British embassy in Israel from Tel Aviv to Jerusalem, in a controversial move that would break with decades of UK foreign policy and follow in the footsteps of Donald Trump.
Iran | The death in custody of an Iranian woman that has sparked widespread protests must be “steadfastly” investigated, Iran’s president Ebrahim Raisi has said. At least 31 people are feared to have died during protests sparked by Mahsa Amini’s death while being held by the morality police.
In depth: ‘This is the biggest package of tax cuts since the 1980s’
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What we know
Kwarteng’s planned tax cuts are the biggest in a generation
After circumstances forced Liz Truss to enact energy price freezes for businesses and consumers, Kwarteng will now tell MPs about another part of the government’s agenda that is much more in his and the prime minister’s ideological comfort zone: tax cuts. Richard Partington has five charts which set the scene for the decisions Kwarteng will announce today.
The chancellor will cancel his predecessor Rishi Sunak’s increase in corporation tax from 19 to 25%. He also announced yesterday that the 1.25 percentage point increase in national insurance will be removed on 6 November, a change that will benefit the richest households far more than the poorest.
There have also been reports the government will cut stamp duty on property purchases, which highlights a tension between the Bank of England and the government, Ben Zaranko said: “The Bank is putting interest rates up because it thinks the economy is running at full capacity, and the Treasury is saying we want to go for growth.”
The Bank may increase interest rates further precisely because of the tax cuts Kwarteng is promising. (This Twitter thread from Sky’s economics editor Ed Conway makes sobering reading for anyone who argues mortgage costs are just getting back to normal levels. See this explainer by Rupert Jones for more on what the rate rise means.)
“This is big – it’s the biggest package of tax cuts since Nigel Lawson was chancellor in 1988,” Zaranko added. The IFS’s £30bn cost estimate “will blow away all of the fiscal headroom the government thought it had in March – it’s getting on for two-thirds of the defence budget.”
‘Investment zones’ will cut red tape but may not boost overall growth
Kwarteng is also expected to announce about a dozen “investment zones” – areas where the government hopes to encourage business investment by granting firms tax relief and cutting red tape. One possible feature reported by the Guardian’s Aubrey Allegretti is the ditching of the requirement to provide affordable housing as part of construction projects.
The investment zones idea is loosely based on the “freeports” already in place in some coastal areas; David Cameron had a similar “enterprise zones” project, which was quietly shelved a few years later. If you haven’t noticed either of those ideas transforming the British economy, that may be because “economists who’ve studied this tend to find it moves growth around rather than increasing it,” Zaranko said.
The project has been billed as Truss’ take on levelling up, but “it isn’t a very efficient way of doing it. The government’s big-picture view has been that it doesn’t matter if growth is happening with bankers in London, because a rising tide lifts all boats. So it’s quite hard to see how this fits into that.”
Borrowing will increase
Given the direction of travel on tax cuts and the cost of the energy price guarantee, increased borrowing appears inevitable. The IFS suggests borrowing could be about £100bn a year by the mid 2020s – more than £60bn a year higher than was forecast in March.
Few disagree that increased borrowing is justified to support the energy price freeze, and many on the left argue that one silver lining of the current crisis is that it has forced a rethink that may last beyond the current government.
But borrowing to fund permanent tax cuts has to be viewed separately to emergency measures, Zaranko said. “These are big decisions that don’t just affect what we borrow this year – but for the economy’s sustainability in the medium term. Kwarteng has said he wants to see debt falling as a share of national income, and it’s hard to see how this is compatible.”
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What we don’t know
What the OBR analysis says
There’s nothing magical about the OBR, which after all has existed only since 2010. Even so, the fact that the government has received its report and elected not to publish is hardly a reassuring signal. “The problem is about announcing very big policies while giving the impression that you’re trying to avoid scrutiny, and that you create an impression of recklessness,” Zaranko said.
There’s also an internal value to OBR analysis, which can be acted on before it is published: “Normally, it allows governments to kick the tyres and make sure what you’re doing is going to get you towards your fiscal objectives,” Zaranko said. “But they don’t have enough information to provide the kind of work you would need for that.”
How markets will react
The cost of borrowing depends in part on what international investors think of the UK – which is part of why the OBR report is significant. “They want a sense of confidence and stability,” Zaranko said. “You’ve already seen borrowing costs rising, and this is unlikely to counteract any of that. I think, probably, most of the impact is already priced in, because so much has already been announced. But it is possible he’ll pull some more rabbits out of the hat which will have an impact.”
One index of how the UK is viewed by investors: A poll for Reuters this week showed 55% of the international banks and economic consultancies say British assets are at a high risk of a sharp loss of confidence.
Whether it will work
Quite a big question, this, and one which might be put another way: are Truss and Kwarteng right to defy the now-infamous Treasury orthodoxy, or what Truss dismissed as “abacus economics” – that budget deficits must be kept under control even in times of economic crisis? Instead, they argue, the UK should bet on big tax cuts to stimulate growth.
There are many on left and right who agree with the first half of this proposition – but the idea that tax cuts which primarily favour the wealthy are the solution has much narrower support. All of this is part of why, as Rowena Mason reports, Kwarteng already has a difficult relationship with officials in the Treasury, who are “angry and really shellshocked” about the removal of permanent secretary Tom Scholar.
“There is a reasonable case for criticism,” said Zaranko (who also acknowledged that the IFS would “fall well within the crosshairs” of those sceptical of the so-called orthodoxy). “That there’s a focus on the short term, too much obsession with making the numbers add up, not enough on the bigger picture.
“But if you want to take that on, you need to do it in all sorts of areas which will not be popular with their base – changes to planning rules, investment in infrastructure, reforming the tax system. You can’t do it overnight. And the idea that you can do it through tax cuts alone seems delusional. But maybe it’s a gamble they need to take, and we’ll be proven miraculously wrong, and charge into economic utopia.” He doesn’t sound very convinced.
What else we’ve been reading
Erin McCormick and Aliya Uteuova investigate how the lead industry created water crises across the US – and got away with it. Nimo
Please enjoy this reader interview with Kevin Bacon, who has good stories about filming in reduced gravity for Apollo 13, why he thought Tremors would be a disaster, and how he avoids dancing to Footloose at weddings. Less plausible is his view that those EE ads are funny. Archie
As the lawsuits continue to pile up on Donald Trump’s doorstep, Moira Donegan asks how much longer he can evade consequences. Nimo
Oh, god, are TV writers deliberately writing memes in? It turns out there’s a plausible case, centred on an annoying line about cake in House of the Dragon. Jess Thomson runs you through the debate. Archie
If you’re trying to cut back on your waste and carbon footprint, you’re in luck. Tony Naylor sets out the best ways to find environmentally friendly restaurants. Nimo
Sport
Cricket | Surrey beat Yorkshire by 10 wickets within three days to seal their 20th County Championship title. Meanwhile, a stunning century from Babar Azam and 88 from Mohammad Rizwan took Pakistan to a remarkable 10-wicket Twenty20 win against England.
Football | Gareth Southgate backed Harry Maguire to stay in his England side ahead of Friday night’s Nations League tie against Italy. Last night, Wales lost 2-1 to Belgium, with Kevin De Bruyne among the scorers.
Tennis | Roger Federer will play alongside Rafael Nadal for his final tennis match as a professional on Friday. The old rivals will team up in the Laver Cup in London, where they appeared at a press conference yesterday alongside Andy Murray and Novak Djokovic.
The front pages
The financial crisis and what Truss is going to do about it take up most front pages today. The Guardian leads with the Bank’s recession announcement and looks ahead to Kwarteng’s big moment today. The Telegraph focuses on Kwarteng’s “warning” to the Bank to get a grip on inflation. The FT gives its splash to the Bank’s announcement, particularly what lies ahead. “BoE increases rate by 0.5 percentage points and hints at big November rise” is the headline. The i looks at the impact on loan costs for homeowners, with the headline: “Millions face mortgage hike as UK heads into recession”. Choosing a more sunny angle are the Mail (“Biggest tax cuts for 30 years!”), and the Express (“Go for growth! Big tax cuts to herald new era”) while the Times treads a line somewhere in-between with “Tax cut bonanza in bid to stop the economic rot”.
Metro focuses on the Britons freed from Russian captivity (Back from death row”), and the Sun reports that Roman Abramovich had a hand in arranging their freedom (“Red Rom gets Brit PoWs out”). The Mirror looks at the fatal stabbing of a pupil outside a school in Huddersfield. The headline is “One more child lost to knife epidemic”.
Something for the weekend
Our critics’ roundup of the best things to watch, read and listen to right now
TV
Andor (Disney+)
This small-screen prequel to Rogue One stars Diego Luna, with the comforting nostalgia of the recent Obi-Wan Kenobi series replaced with something gnarlier. There’s an earthy wisdom to Andor – however it’s a relief when it whips out the laser guns and hoverbikes, as it shapes up to be the best Star Wars show since The Mandalorian. – Jack Seale
Music
Vieux Farka Touré and Khruangbin – Ali
Vieux Farka Touré’s latest collaboration might be his most impressive to date. Named after his father, Ali reinterprets some of Farka Touré Sr’s best-known songs with Houston trio Khruangbin. The result recalls late-90s Air with some perfectly complementary moments: Diarabi’s tale of romantic woe is rendered as an entirely gorgeous, soft-focus R&B ballad, gilded with melancholy backing vocals. – Alexis Petridis
Film
After Yang
This entirely absorbing movie from Korean-American director Kogonada stars Colin Farrell and Jodie Turner-Smith and is adapted from a short story by Alexander Weinstein. There are touches of Philip K Dick and even Charlie Kaufman in its story of an AI robot child who goes wrong, in what is also a pregnant meditation on grief, loss, memory and consciousness. – Peter Bradshaw
Podcast
Hoaxed
Widely available, episodes weekly
“If it was up to me, this story would never have been made public.” So goes the intro to this troubling look at conspiracy theories, which is Tortoise’s follow-up to Sweet Bobby – voted 2021’s best podcast by the Guardian. It’s compelling and measured, following two children’s fictional claims that they were victims of a satanic paedophile cult. – Alexi Duggins
Cartoon of the day | Lorna Miller
The Upside
A bit of good news to remind you that the world’s not all bad
After the 19th century, much of Kikuyu culture was wiped out from Kenyan society because of colonial suppression. Almost two centuries later there has been a renewed curiosity around indigenous cultural practices. Wairimu Mukuru, a Kikuyu language teacher, started posting TikTok videos about Kikuyu culture earlier this year and has already garnered over a million views. Mukuru is part of a small but growing group of Kenyans who are working to re-centre precolonial spiritual practices that prioritise matrilineal kinship and environmental protection.
Sign up here for a weekly roundup of The Upside, sent to you every Sunday
Bored at work?
And finally, the Guardian’s crosswords to keep you entertained throughout the day – with plenty more on the Guardian’s Puzzles app for iOS and Android. Until Monday.
