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Maxi budget

Maxi budget

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Chancellor Kwasi Kwarteng set out the government’s economic plans in a so-called mini budget. But his tax cuts and plans for government borrowing are some of the biggest in living memory.

The new chancellor has set out his economic plans in a statement to the House of Commons.

Kwasi Kwarteng called it a “mini-budget”, because it’s not an official budget, but it’s actually one of the biggest changes to the country’s finances in living memory.

It includes getting rid of the 45 per cent income tax rate for higher earners, dropping the basic rate down to 19 per cent and reverses the former chancellor Rishi Sunak’s plan to raise corporation tax and national insurance rates.

This will simplify the tax system and make Britain more competitive. It will reward enterprise and work. It will incentivise growth. It will benefit the whole economy and the whole country.”

Kwasi Kwarteng delivering his budget in the House of Commons


These are the biggest tax cuts in 50 years and they’re being made in the name of economic growth, which sounds great, so why have they come in for so much stick?

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Normal budgets are accompanied by forecasts from the independent Office for Budget Responsibility. By presenting a budget in all but name, the chancellor has avoided this scrutiny. 

It’s easy to see why. The numbers just don’t add up.

Kwasi Kwarteng’s tax cuts will cost almost £45 billion a year.

To fund them, the government will have to borrow enormous sums of money. So much, in fact, that total government borrowing is forecast to rise above £110 billion by 2027. That’s £80 billion more than what the Office for Budget Responsibility predicted in March.

On this trend, government borrowing is set to reach its third-highest peak since the Second World War.

The markets – which will have to lend the government money to fund these cuts – are worried about the sustainability of this borrowing.

The interest rate on 10-year government bonds spiked by 0.5 percentage points after Kwasi Kwarteng’s announcement – making it more expensive for the government to borrow money.

It was the highest jump in a single day in more than 30 years.

If this higher rate persists, it would add £5 billion a year to borrowing.

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Another measure of how spooked the markets are is the value of the pound.

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

A weaker pound will make imports more expensive and because the UK imports more than it exports, the prices of a lot of goods and services in the country will rise.

The UK imports more than 50 per cent of its food, for example, so the cost of everything from fruit and vegetables to oils and grains will go up.

And that’s in an economy where inflation, the rate at which prices are rising, is already very high.

Presenter: And a lot of the forecasts suggest it’ll be back up in October.

Guest: Yeah, I mean wouldn’t call 9.9 per cent inflation good news in any sense of the word given that the target is two.”

Bloomberg

Kwasi Kwarteng’s tax cuts are almost designed to create inflation. The idea behind them is that they’ll allow people to spend more of their income. 

But injecting demand – some £40 billion a year – into a high-inflation economy puts the government on a collision course with the Bank of England, because its job is to control inflation.

The central bank raised its base interest rate to 2.25 per cent – its highest level since 2008 – a day before Kwasi Kwarteng’s announcement. The markets now expect the bank to raise its rate to a staggering 4 per cent at its next monetary policy meeting in November to stop the pound’s slide.

If it does that then it’ll increase the cost of consumer debt, like mortgage and credit card payments, which are already an issue for people on low incomes.

And the tax cuts announced by the chancellor won’t help those people.

An analysis by the Institute for Fiscal Studies, an independent think tank, found that only people with incomes of at least £155,000 a year will be net beneficiaries of Kwasi Kwarteng’s plans.

Here’s Mark Littlewood, head of the free market think-tank the Institute of Economic Affairs, which has been advocating these policies for decades.

“If all you care about is the distributional impact of the tax cuts in the next 24 weeks you’re not going to like this package if you care more about the poor.”

Mark Littlewood, Director of the Institute for Economic Affairs, Sky News

Kwasi Kwarteng’s economic plans have been called a “gamble”, because he’s forcing through huge changes that risk the sustainability of the country’s public finances, that may widen inequality, in the hope of generating economic growth.

It’s possible that through concerted policy reforms across government and through luck alone, economic growth may be higher than expected.

But that’s an odd way to make economic policy in the 21st century.

The chancellor isn’t just gambling on a “mini-budget.” He’s betting the house.

This episode was written by Paul Caruana Galizia and mixed by Imy Harper. 


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