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Growth gamble

Growth gamble

0:00

The markets are in turmoil, the International Monetary Fund has openly criticised the government and the Bank of England has been forced to take emergency action. But the government is sticking to its plan, so how could it deliver growth?

Mr Speaker, we’re at the beginning of a new era…”

Kwasi Kwarteng delivering his “mini budget”

A lot has been written and said about the chancellor’s “mini budget”, which Kwasi Kwarteng called his Growth Plan.

Our aim over the medium term is to reach a trend rate of growth of 2.5 per cent…”

Kwasi Kwarteng delivering his “mini budget”

That’s compared to the 1.7 per cent previously forecast by the independent Office for Budget Responsibility.

Our plan Mr Speaker is to expand the supply side of the economy through tax incentives and reform.”

Kwasi Kwarteng delivering his “mini budget”

But there was no plan for how to pay for it, except through huge amounts of additional government borrowing.

And his statement wasn’t accompanied by new independent forecasts, so it’s not clear if, or when, that 2.5 per cent growth rate might be achieved.

Which is why the markets took fright, the International Monetary Fund openly criticised the government’s plans… and the Bank of England had to launch a £65 billion emergency intervention to stop some pension funds from going bust.

We are keeping an eye on the currency markets around the world because the pound has fallen to its lowest level against the US dollar in 50 years.”

BBC Breakfast

Sterling plummeted after the IMF and other rating agencies slammed last week’s mini budget announced by Britain’s chancellor Kwasi Kwarteng.”

RTE

Worried about the credibility of the chancellor’s plans, traders have been selling government bonds…”

BBC News

But still Liz Truss and Kwasi Kwarteng insist that their plan is the right one to get the economy growing. So how do they think their measures will achieve that?

***

hey believe that if people have to pay less in tax they’ll instead spend that money on goods and services, which is good for the economy.

In his statement Kwasi Kwarteng announced that as well as reversing the increase in national insurance he’ll also cut the basic rate of income tax by 1 pence in the pound and get rid of the top rate completely.

“I’m not going to cut the additional rate of tax today Mr Speaker, I’m going to abolish it all together.”

Kwasi Kwarteng delivering his “mini budget”

Currently, people who earn more than £150,000 a year have to give 45 pence of every pound they earn to the tax man… but from April 2023, that will drop to 40 pence.

For the very rich, it will be a huge cash benefit, which it’s hoped they’ll spend and invest in the UK economy.

***

Kwasi Kwarteng also wants to attract financial service firms back to the UK after some left because of Brexit.

“We need global banks to create jobs here, invest here, and pay taxes here in London, not in Paris, not in Frankfurt, and not in New York.”

Kwasi Kwarteng delivering his “mini budget”

That’s why he’s scrapped the cap on bankers’ bonuses that was introduced by Conservative prime minister David Cameron in 2014.

“All the bonus cap did was to push up the basic salaries of bankers or drive activity outside Europe. It never capped total remuneration.”

Kwasi Kwarteng delivering his “mini budget”

It’s designed to attract investment and people with well paid jobs, which the government thinks will benefit everyone, because it means more money being spent in the UK and more people paying tax.

***

There were also tax cuts for businesses.

“We will have the lowest rate of corporation tax in the G20…”

Kwasi Kwarteng delivering his “mini budget”

The new chancellor believes that additional tax on businesses is just passed on to consumers through higher prices, lower wages or both.

So he announced that next year’s planned increase in corporation tax from 19 per cent to 25 per cent will not go ahead.

“This will plough almost £19 billion a year back into the economy, that’s £19 billion for businesses to reinvest, create jobs, raise wages, or pay dividends that support our pensions.”

Kwasi Kwarteng delivering his “mini budget”

Stamp duty was also cut to inject more money into the housing market and get people selling.

And it’s not just tax cuts.

Kwasi Kwarteng also set out 138 rail, road and energy projects that have been earmarked for acceleration to stimulate economic activity.

And there are plans to simplify planning laws, cut regulation on businesses and relax restrictions on immigration.

But in the absence of an independent forecast to predict the impact of all this, it’s hard to know whether it’ll work. The Tony Blair Institute has had a go though, and it thinks the Growth Plan will have a negligible impact on growth, with output only around 0.4 per cent higher by 2027–2028 compared to what it would’ve been without the tax cuts. 

So it’s definitely a gamble.

This episode was written by Imy Harper and mixed by Lewis Vickers.


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