Why the biggest tax-cutting budget since 1972 means we’re all worse off

As years go, 1972 was particularly inauspicious. Northern Ireland saw the Bloody Sunday massacre and the introduction of direct rule; the Watergate burglars were arrested; and terrorists attack Israeli athletes at the Munich Olympics. “American Pie” by Don McLean was high in the charts as was Lindisfarne’s “Fog on the Tyne”.

It was also the year of former Tory Chancellor Anthony Barber’s ill-fated 1972 “dash for growth” budget. Barber cut taxes by the equivalent of around 2 per cent of GDP at the time.

Instead of the hoped-for growth, within months of the Budget, the chancellor was forced to float the pound, resulting in a sharp decrease in its value and massive inflationary pressure on Britain’s economy.

A global oil price shock quickly followed as Opec dramatically increased the price of oil further, adding to the inflationary pressure and the UK’s recession woes. Widespread industrial unrest swiftly followed as workers lobbied for wages to meet the cost of living crisis.

Eventually Prime Minister Ted Heath was forced to call an election early in 1974 and Barber lost his job as chancellor as Harold Wilson was returned to office with a minority Labour government.

Heath was ousted by Labour’s Harold Wilson in the February 1974 election, albeit with a minority in a hung parliament.

Comparisons with Kwasi Kwarteng’s great growth giveaway were quickly drawn.

Paul Johnson, director of the Institute for Fiscal Studies (IFS), said Kwarteng’s tax cuts were about 50 per cent more than expected, and were rivalled only by Barber’s.

Johnson warned the Barber boom “ended in disaster”. It certainly ended very badly for both the Conservatives and Britain, with the first recession since the Second World War, spiralling inflation, rising unemployment, and the largest balance of payments deficit previously recorded. “That Budget is now known as the worst of modern times,” he said. “Genuinely, I hope this one works very much better.”

Kwarteng’s giveway also drew comparisons with former Chancellor Nigel Lawson’s largesse in the 1988 Budget.

Lawson was also accused of sparking a speculative boom, which – while it reduced unemployment by nearly 1 million – fuelled an inflationary boom that created pressure for the UK to join the ill-fated European Exchange Rate Mechanism in 1990.

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While the comparisons are irresistible, there are significant differences. UK inflation in 1972 was 7.3 per cent, lower than the current 9.8. The UK economy was more industrialised, with a bigger manufacturing sector ready to respond to growth opportunities.

Global export markets might have increased the potential for British goods to find customers, as Prime Minister Liz Truss discovered in the US last week, but the diplomatic barriers to accessing them have become higher.

But direct comparisons can be treacherous, as housing analyst Neal Hudson’s comparisons between interest rates in the 1970s and the present day show.

In 1979, interest rates averaged 11.3 per cent over the year, higher than current rates. He points out people were less indebted and had higher comparative incomes to pay their bills, causing that 11.3 rate to be the equivalent to a 2.1 per cent interest in current cash terms.

A period of high interest rates saw an average rate of 12.7 per cent between 1980 and 1989. Hudson argues that because people were so much less indebted on average and their earnings were higher – compared with current mortgage payments – the eye-watering double-digit interest rates felt about the same as a 3.5 per cent interest rate would feel today.

On average, UK households are far more indebted than their predecessors, and have lower earnings compared with their mortgage repayments, so much so that even relatively low interest rates result in the same burden as a double-digit rate did back in the 1980s.

If interest rates rise to 5-6 per cent, as many economists have signalled, then that could see mortgage burdens reaching similar levels to the late 1980s ahead of the housing crash.

Finally Kwarteng himself is keen to distance himself from comparisons with the ill-fated 1972 budget.

“The Barber boom was driven primarily by very, very loose monetary policy — it was essentially a demand sort of pump-priming experiment. This is the opposite of that,” Kwarteng said. “What we’re trying to do is to create incentives, and also look at supply side reform. It’s a completely different model.”

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