Kwasi Kwarteng, UK Chancellor, has taken a huge political gamble with a mini budget to boost the UK economy, with £45billion in tax cuts, including the scrapping of the 45p top tax rate for the highest incomes.
The package will delight many of the City of Londoners and the wealthy. It removes the 45p rate, applied to income over £150,000. Kwarteng has confirmed that it is removing the cap on bankers’ bonuses.
The mini-budget sent the cost of borrowing significantly higher and the pound to a new 37-year low against the dollar, just below $1.11.
Kwarteng said his mini-budget would boost growth, but admitted many of his measures would be unpopular; his decision to increase large-scale borrowing jeopardizes his party’s claim to fiscal responsibility.
The Treasury said it would ask the Debt Management Office to raise a further £72billion in the current financial year, revising the total upwards from £161billion in April to £234billion. pounds sterling in September.
The additional borrowing is much more costly for the government than before, with the cost of borrowing over two years dropping to 3.9% from 0.4% a year ago.
The Chancellor is banking on the political fortunes of the Tories in believing that sweeping tax cuts and deregulation can bring Britain’s anemic growth rate back to its pre-financial crisis average of 2.5%.
“This is a new approach for a new era of growth,” Kwarteng told MPs, to a chorus of Tory cheers and boos from the Labor benches.
The series of tax cuts was even bigger than Nigel Lawson’s 1988 budget cuts. Paul Johnson, director of the Institute for Fiscal Studies, said: ‘It has been half a century since we have seen tax cuts announced on this scale.
The basic rate of income tax will be cut from 20 pence to 19 pence next April, National Insurance has been reduced, stamp duty has been reduced to help first-time buyers and a planned hike in l corporation tax has been abolished.
But unlike Chancellor Margaret Thatcher, Kwarteng will borrow tens of billions of pounds to fund her plans, adding to demand at a time when the Bank of England is raising interest rates to tame inflation.
The combined cost of the tax cuts by 2026-27 will be almost £45billion. Kwarteng told MPs in a statement to the House of Commons that his aim was to turn “the vicious circle of stagnation into a virtuous circle of growth”.
The chancellor’s package combined tax cuts with a series of supply-side reforms that he said could be unpopular in the short term; he insisted he would be “unapologetically” pro-growth.
However, he admitted that transforming Britain’s growth outlook “won’t happen overnight”. For the new government of Liz Truss, time is running out because an election is scheduled for 2024.
Anticipating criticism that he was unduly helping the wealthy, Kwarteng reminded MPs that the government was stepping in to cut household and business energy bills. He said the cost for the first six months would be £60billion.
Kwarteng’s decision to lift the cap on bankers’ bonuses aims to make the City of London more competitive but leaves the Tories open to Labor claims that it is still “the party of the rich”.
Meanwhile, his lifting of the ban on fracking shale gas and a promised overhaul of environmental legislation to speed up infrastructure projects have enraged the green lobby.
His borrowing spree – which comes at a time when the cost of servicing the public debt is rising sharply – is seen by Labor leader Sir Keir Starmer as a landmark moment: Starmer wants to claim the mantle of fiscal responsibility during the next elections.
Among other measures announced by Kwarteng, corporate tax rates will remain at 19%, but it will maintain the 8% charge on banks’ profits, which was to be reduced next year.
The government’s fiscal rules, which stipulated that the debt should decline as a proportion of gross domestic product within three years, would be reviewed. “In due course, we will release a medium-term fiscal plan,” Kwarteng said.