Kwasi Kwarteng wants a virtuous circle of growth. He is betting it can be achieved with the UK’s most dramatic package of tax cuts in 50 years. The result could just as easily be a debt spiral driven by soaring borrowing at steeply rising rates.
Today’s mini-budget is in fact “one of the biggest budgets of our lifetimes, and they’re not even calling it a budget,” says Gregory Thwaites, research director at the Resolution Foundation.
It will
- take 1p off the basic rate of income tax from next April;
- scrap the 45 per cent top rate of tax;
- scrap the two-times-salary bankers’ bonus cap;
- scrap Rishi Sunak’s planned increase in National Insurance contributions;
- scrap a planned six-point increase in corporation tax, holding it at 19 per cent even though there is little evidence this will boost investment;
- remove planning restrictions for onshore wind farms, although Kwarteng left this out of his statement to the Commons.
Further measures include requiring those on benefits to actively search for work or risk reductions in benefits; boosting investment in infrastructure; and making it more difficult for unions to call strikes.
The package is designed to benefit everyone, but especially the rich: a nurse on £30,000 will be £391 better off in 2023/4; a banker on £200,000 will be £4,333 better off, with no limit on her bonus.
The goal is to attract surging inward investment and revive the City’s status as the world’s financial centre. Kwarteng is aiming for GDP growth of 2.5 per cent next year, compared with forecasts of around 0.1 per cent, rising to 1 per cent in 2024.
Like last week’s energy subsidies, today’s tax cuts will have to be funded by borrowing, which is why the government has issued a total of £234 billion of new debt since April.
Markets reacted badly: a sharp sterling sell-off sent the pound as low as $1.10 and the yield on ten-year government bonds rose to its highest since 1998.
Will it work? “Lowering tax to stimulate the economy is a hard bet,” Thwaites said. “If it doesn’t stimulate the economy it’s a bad decision.”
There are two possible outcomes:
- Either the tax cuts do spur economic activity, production and consumption grow along with tax receipts and the UK dodges recession.
- Or the sceptics are proved right, trickle-down economics doesn’t work and the tax cuts succeed only in increasing inequality, debt and deficits.
Albrecht Ritschl, professor of economic history at the LSE and one of the sceptics, said “no real economist would agree that these policies can create growth”. Danny Blanchflower, a former Bank of England advisor, called the package “the most inept economic policy I’ve seen in 55 years of doing economics”. Julian Smith, a Conservative MP, praised the statement’s “positive enterprise measures” but said its huge tax cut for the very rich was “wrong”.
Rupert Lee-Browne, a forex executive, told the FT Kwarteng’s statement would “put a big smile on the face of the City”.
What next? If growth fails to materialise the government will have to cut costs, but it has committed to more military spending and cannot afford politically to cut spending on the NHS.
Where would the axe fall? Will Kwarteng be spared the task of wielding it by conjuring growth from imminent recession? Time will tell.
With additional reporting from Giles Whittell and Phoebe Davis
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Editor’s Voicemail
Kwasi Kwarteng’s mini budget is a huge gamble
The government has promised a new era of growth. But there’s no guarantee the measures the chancellor has just announced will usher one in
Photograph HM Treasury/Flickr