On Friday, chancellor Kwasi Kwarteng delivered his mini-Budget in the House of Commons, outlining significant changes to fiscal policy.
Income Tax
One of the major changes - which will impact over 31 million people - sees the basic rate of income tax cut from 20 pence to 19 pence from April 2023, one year earlier than planned.
This cut will apply to individuals earning between £12,571 and £50,270 per year.
Kwarteng has also announced that he will scrap the 45 per cent tax band, the highest tax rate in the UK which is targeted at those earning in excess of £150,000 per annum. They will instead be subject to the 40 per cent rate currently applied to those earning over £50,270 per annum.
Corporation tax hike halted
In a statement of support for business, Kwarteng has also cancelled the planned corporation tax rise for April 2023, which would have seen businesses paying out an additional six per cent (19 per cent to 25 per cent).
The chancellor has also signalled his intent to remove the cap on bankers’ bonuses and suggested that new investment zones will be created to allow businesses within to benefit from tax cuts.
Kwarteng said that high tax rates would “damage Britain’s competitiveness”, and the cut to the highest tax bracket for individuals and cancellation of the corporation tax hike were designed to “reward enterprise and growth.”
The chancellor said: “Growth is not as high as it needs to be, which has made it harder to pay for public services, requiring taxes to rise.
“This cycle of stagnation has led to the tax burden being forecast to reach the highest levels since the late 1940s. We are determined to break that cycle. We need a new approach for a new era focused on growth.”
Elsewhere, further planned increases in duty for beverages such as beer, cider, wine and spirits have been scrapped.
National Insurance increase reversed
The National Insurance increase that came into effect in April this year is also to be reversed from November 6, 2022, removing the additional 1.25 pence in the pound that individuals have been paying. The new Health and Social Care Levy which was planned by Boris Johnson’s government to fund the NHS and social care will also not go ahead.
The Treasury estimates that the National Insurance cutback will save 28 million people £330 per year on average and save around 920,000 businesses just under £10,000 that they would’ve paid out in additional contributions, a move which will further help firms.
Kwarteng said: “Taxing our way to prosperity has never worked. To raise living standards for all, we need to be unapologetic about growing our economy. Cutting tax is crucial to this.”
The Health and Social Care Levy had been poised to raise around £13 billion per year for social care and channel funds to the NHS to help tackle the Covid backlog.
Housing
In another significant move, Kwarteng has made changes to stamp duty in England by increasing the threshold for paying it to £250,000, and to £425,000 for first-time buyers. The previous level was set at £125,000, and the chancellor said that the change will exempt 200,000 people from having to pay it.
Kwarteng has also raised the value of properties on which first-time buyers can claim stamp duty relief. Previously set at £500,000, this has now been upped to £625,000.
Planning rules are also set to be relaxed by the government to incentivise developers to build more houses.
Policy cost
The cost of cutting these taxes is estimated at about £30 billion per year and the government will increase borrowing to accommodate.
Kwarteng also revealed government estimates around the cost of plans to cap energy bills for homes and businesses from October to April, suggesting this would come to around £60 billion depending on the volatility of energy prices.
Kwarteng said: “We expect the cost to come down as we negotiate new, long term energy contracts with suppliers.”
Reaction
It is a bold move for Liz Truss’ government to move radically away from her predecessor Boris Johnson’s economic policies, reducing tax and increasing borrowing at a time when interest rates have been consecutively increasing by the month.
As recently as Thursday, the Bank of England hiked interest rates for the seventh time in a row to 2.25 per cent, the highest levels seen since 2008 during the global financial crisis.
The independent Institute for Fiscal Studies [IFS] think tank has called the move a “gamble on growth that may not pay off”. The IFS’ Paul Johnson pointed out that the tax cuts were the largest announced since the 1972 Budget and significantly more than economists had expected, potentially leaving the country borrowing as much as £120 billion per year in three years’ time to finance the policies.
Yet, Johnson conceded that the plans would be “manageable” if economic growth “really picks up”, despite the risk of vast amounts of money going into the economy amid rampant inflation. Kwarteng and his fellow ministers will feel that with the Bank of England suggesting the economy could already be in recession, going all-out in this way in a bid to stimulate growth is a risk worth taking.
Kwarteng himself labelled this suite of policies as the start of “a new era, focused on growth” which would “turn the vicious cycle of stagnation into a virtuous cycle of growth”.
Fascinatingly, the government has not released an independent projection of how the move will affect the economy. It would normally do so when the chancellor delivers the Budget, but Kwarteng has opted not to do so owing to the technicality that his statement was not technically a full Budget.
Kwarteng did reassure MPs that the Office for Budget Responsibility would publish its economic forecast before the end of 2022, before compiling another in 2023.
Labour’s response to the mini-Budget has been scathing. The opposition party has accused the government of pursuing a “trickle-down” economics approach that is “outdated” and will not work.
Shadow chancellor Rachel Reeves called the move a “plan to reward the already wealthy” and an admission of years of economic policy failure by the Conservatives.
Reeves said: “The prime minister and chancellor are like two desperate gamblers in a casino chasing a losing run.
“The Conservatives cannot solve the cost-of-living crisis, the Conservatives are the cost-of-living crisis, and our country cannot afford them anymore.
“The chancellor has made clear who his priorities are today. Not a plan for growth. A plan to reward the already wealthy. A return to the trickle-down of the past. Back to the future, not a brave new era.”
Labour shadow chief secretary to the Treasury, Pat McFadden, criticised the government’s decision to fund measures through borrowing rather than extending the windfall tax on energy companies.
