UK chancellor Kwasi Kwarteng today unveiled a tax-cutting mini-Budget, announcing more than 20 new policies as part of the government’s new "pro-growth agenda".
Kwarteng announced a "new approach for a new era", based on what he said were three pillars of supply-side reform, tax cuts and a responsible approach to public finances. The tax cuts announced are expected to cost £45bn by 2026-27, meaning today’s fiscal event represents the biggest round of cuts in 50 years.
Borrowing will be increased to pay for the cuts, with the government now anticipating that it will raise £234bn from gilt issuance and similar financing in the current financial year, up from a previous figure of £161bn.
Kwarteng announced a widely anticipated stamp duty cut and reversed a planned increase in corporation tax as part of his statement to the House of Commons. The chancellor also announced the creation of new 'Investment Zones' around the country, which will receive a raft of tax benefits, and said the government would prioritise a range of infrastructure projects, including roads and some renewables development.
Despite a series of pre-announcements, there were several surprises, chief of which was Kwarteng pledging to abolish the additional rate of income tax from April 2023. The basic rate of income tax will also be lowered, from 20p to 19p, next April – a year earlier than planned.
Among other policies, the chancellor scrapped VAT for overseas tourists and announced plans to accelerate reforms to the pensions charge cap, in a bid to provide more funding to high-growth businesses. He also promised liberalisation of the country's planning system.
The statement also included a series of contentious regulatory reforms, including scrapping a cap on bankers' bonuses and labour market policies designed to reduce inactivity. Under these reforms, the government will strengthen the Universal Credit sanctions regime to set “clear work expectations” and provide more support to inactive over 50s.
The new pledges come in addition to a reversal in the 1.25 percentage point rise in national insurance and the 1.25 percent ‘dividend tax’ cut announced yesterday.
Earlier this month, the government also revealed its energy price guarantee policy, which will see average household energy bills capped for the next two years.
The energy price guarantee alone is expected to cost £60bn this year, and economists estimate a total cost as high as £150bn over the course of the two-year period.
Unlike a full Budget, the fiscal statement was not accompanied by forecasts from the Office for Budget Responsibility (OBR), nor did the watchdog independently verify the Treasury’s cost estimates. Kwarteng pledged to publish a medium-term fiscal plan in due course, and announced that the OBR would publish a full economic forecast before the end of the year.
The chancellor also confirmed a commitment to achieving annual gross domestic product (GDP) trend growth of 2.5 per cent.
In a statement from HM Treasury yesterday, Kwarteng said that “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,” he added.
But the move has been met with scepticism by economists. The trend growth rate has not been reached since the 1980s, and Capital Economics’ Ruth Gregory argues that the UK would need to see “a sustained acceleration in productivity growth and/or labourforce growth to lift potential GDP growth to 2.5 per cent”.
The Institute for Fiscal Studies warned that the chancellor should not underestimate the challenge of boosting UK economic growth, describing the idea that headline cuts can deliver sustained growth as “a gamble, at best”.
