Chancellor slashes taxes in bid to boost growth
Newly-appointed chancellor Kwasi Kwarteng unveiled his plans to boost economic growth on Friday, including axing the cap on bankers’ bonuses, abolishing the highest rate of income tax and permanently increasing the stamp duty threshold.
Addressing the House of Commons, Kwarteng told fellow politicians that the government was targeting annual growth of 2.5% in the medium term.
"Growth is not as high as it should be," he said. "We need a new approach for a new era, focused on growth."
Confirming a number of measures that had been flagged during the week, Kwarteng said the cap on bankers’ bonuses - introduced across the European Union in response to the financial crisis - would be scrapped.
He said: "All the cap did was push up the basic salaries of bankers, or drive activity outside of Europe. It never capped total remuneration. So we’re getting rid of it."
A planned increase in corporation tax, due to come into effect next year, will also be scrapped. Leaving corporation tax at 19% means the UK would have the lowest rate in the G20, Kwarteng said.
In addition, the top rate of tax for higher earnings will be cut permanently to 40% from 45% from April 2023, at a cost of around £2bn a year to the Treasury. The basic rate will be reduced by a penny to 19p in the pound.
As expected, Kwarteng confirmed that the 1.25 percentage points rise in National Insurance - introduced earlier this year by predecessor Rishi Sunak to help fund social care - will be unwound from 6 November. Kwarteng said additional funding for the NHS would be maintained at the same level, though did not immediately specify how.
The threshold on stamp duty was also be raised, to £250,000 from £125,000, on permanent basis, while first-time buyers will only pay stamp duty on homes worth £425,000, up from £300,000.
A stamp duty holiday was introduced during the pandemic to help support the market and prop up house prices, but was unwound last year.
The UK Debt Management Office confirmed that the government would need to borrow a further £72.4bn to pay for the package of tax cuts. The DMO, which manages the government’s borrowing and cash needs, upped its net financing requirement for the current year to £234.1bn from £161.7bn following the mini budget.
Other plans announced included simplifying VAT-free shopping for overseas visitors and freezing alcohol duty from February 2023. Around 120,000 people on Universal Credit will be asked to take "more active steps" towards looking for work, or face losing their benefits, and legislation will be introduced to make it harder for workers to take strike action.
In response, shadow chancellor Rachel Reeves said the current government had "six so-called plans for growth since 2010 - a litany of failure, every single one of them".
She also heavily criticised the government's unusual decision not to publish the Office of Budget of Responsibility’s growth forecasts, something that normally happens alongside budgets. "Never has a government borrowed so much, and explained so little," Reeves told Kwarteng.
Kwarteng also reiterated the government’s previously announced plans to tackle the energy crisis, including capping household bills at £2,5000 per year, noting that it would cost around £60bn in the first six months.
Plans to tackle soaring government debt would be published later this year, he added. Public sector net borrowing excluding public sector banks reached a record £11.8bn in August.
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: “Collectively, these measures equate to a £26.7bn giveaway in 2023/24, or approximately 1% of GDP. But the support to GDP will be relatively modest, given that the biggest winners of these policies are high earners, whose expenditure is not that responsive to changes in their income.
“Indeed, these households are already cash-rich, having saved unusually large amounts during the pandemic.
“All told, we believe that the economic outlook has not been transformed by these tax cuts. The government will need to focus much more on policies to boost labour supply if it is to have any chance of hitting its target of raising the economy’s trend growth rate to 2.5% per year.”
Susannah Streeter, senior investment and markets analyst Hargreaves Lansdown, said: “The [Liz] Truss administration wants to put a rocket under growth, but there is a risk that after a first boost, the policies could crash and burn, particularly if government borrowing costs soar further. There are signs that buyers of UK government bonds are becoming even more nervous about the government’s policies, given the mounting debt pile.
“Inflows to government coffers will be significant reduced just at a time when they are being depleted to fund the energy price freeze.”