Chancellor Kwasi Kwarteng has rejected suggestions that his mini-budget is ‘a gamble’ as the markets’ reaction to his tax cuts sent the pound plunge to a new 37-year low against the dollar.
The pound plummeted after Chancellor Quasi Quarteng announced the largest series of tax cuts in half a century to improve declining living standards by boosting growth.
Using more than £70bn in more loans, Mr Kwarteng on Friday put together a package that would abolish the highest income tax rate for the highest earners.
He cut stamp duties on homebuyers and proposed a cut in the basic income tax rate to £19 pence a year earlier, to April, as part of tax cuts costing up to £45bn a year.
Mr Kwarteng said the House of Commons tax cuts are “critical to solving the growth problem”, while confirming plans to remove the cap on bankers’ bonuses while adding restrictions to the social security system.
But the pound plunged to a new 37-year low as ‘shocked’ traders swallowed the cost of the spree launched by the Chancellor and Prime Minister Liz Truss two years before the general election.
The price of Government borrowing rose even higher as UK bond yields rose on fears the package would collapse UK markets.
Ministers were accused by the Institute of Fiscal Studies (IFS) of “betting the house” by putting the national debt on an “unsustainable upward path”.
The scathing assessment from the respected financial think tank said only those with incomes over £155,000 will be net beneficiaries of the tax policies announced by the Conservatives over the current parliament, with the “vast majority of income taxpayers paying more tax.” “.
But Mr. Kwarteng argued that with new deregulation, his economic outlook “will turn the vicious circle of stagnation into a virtuous cycle of growth”.
He told reporters during a visit to a modular housing factory in Kent with Prime Minister Liz Truss after revealing his budget: “It’s not a gamble.
“What’s a gamble is thinking you can keep raising taxes and get wealth, which clearly didn’t work.
“We can’t have a tax system where you peak at 70 years, so the last time we had tax rates at this level for my tax cuts was actually before Her Majesty took the throne.
“That was totally unsustainable and that’s why I’m happy that I was able to reduce taxes on the slopes this morning.”
Asked whether the decline in sterling – which has fallen to its 37-year low against the dollar – is good for the economy, he said: “I don’t comment on market movements, but what’s good for the economy is creating an environment for people to come and invest in the UK and that is exactly what we have done.”
Shadow Chancellor Rachel Reeves, however, likened the Prime Minister and Mr Kwarteng to “two desperate gamblers in a casino looking for a lost point”.
Treasury estimates have priced the tax cuts, including the promised rollback of the national insurance hike and abolishing the corporate tax hike, at nearly £45 billion a year by 2026.
Critics questioned the fairness of the package, as the top 660,000 earners received an average annual tax cut of £10,000 with the income tax amendment.
From April, those earning more than £150,000 a year will no longer pay the top rate of 45% and those with £50,271 will pay the 40% rate.
The main spending package included:
– Cuts to stamp duty in England and Northern Ireland, immediately doubling the exemption level from £125,000 to £250,000 and raising it from £300,000 to £425,000 for new buyers.
– An estimate that the energy bill bailout will cost around £60 billion in two years’ time in the first six months from October.
– The planned increase in alcohol tax on beer, cider, wine and spirits is canceled and costs £600 million.
– New low-tax “investment zones” that can ease planning rules and lower business taxes to encourage investment.
– Legislation to force unions to put wage offers to members’ vote so that strikes cannot be declared until negotiations are completely broken.
– Confirmation of plans to get approximately 120,000 more people with Universal Credit to take active steps to seek more and better-paid work, otherwise their benefits will be reduced.
The package was announced a day after the Bank of England warned that the UK may already be in recession and hiked interest rates to 2.25%.
That move made government borrowing more expensive than at any time in the past 13 years.
Paul Johnsonthe IFS director, said Mr. Kwarteng’s “gamble on fiscal sustainability” was the “biggest tax-cutting event since 1972.”
Amid rising interest rates, he warned that the Bank of England will certainly raise interest rates further in response to the package.
Johnson said: “The first signs are that the markets – which will have to lend the money needed to close the gap in the government’s budget plans – are unimpressed. This is worrying.”
Johnson also warned it was “inconceivable” that no further government spending would be announced unless the government allows “further deterioration” in public services.
“Presumably this government would also borrow for that. Mr. Kwarteng isn’t just betting on a new strategy, he’s betting on the house,” Johnson said.
Mr Johnson warned that the tax cut package announced 50 years ago by then-Chancellor Anthony Barber under a growth dash “ended in disaster”.
Mr Kwarteng promised that debt would fall as a percentage of GDP in the medium term, but the Treasury estimates that according to current forecasts, the package would need to increase GDP by 1% every year for five years to cover the cost of the new tax cuts. cover.
The Treasury said the total package would be financed by increasing borrowing by £72.4 billion.
The IFS predicts that government bonds could remain up to £110 billion a year even after the massive energy bailout package expires in two years, and that future tax increases or cuts will be needed to pay the mounting debt.
In the surprising move of what had been called a mini-budget, Mr Kwarteng spent around £2bn a year from 2025 on abolishing the top rate of income tax.
Treasury estimates say it will save top earners an average of £10,000 a year.
Torsten Bell, chief executive of the think tank Resolution Foundation, said those who earn £1 million annually will receive a £55,000 tax cut next year thanks to the broader package.
There was also some unease in the Tory party, with Mel Stride, chairman of the Treasury Select Committee, saying a “huge void” had been created by the lack of forecasts from the Office for Budget Responsibility.
The chancellor avoided scrutiny from the independent financial analysts by describing the package as a “fiscal event” rather than a full budget.
Ms Reeves said: “Never has a government spent so much and explained so little.”
As for banker’s bonuses, Mr. Kwarteng said the cap to cap them at twice the salary “never capped the total pay”, adding: “So we’re going off it.”
Pat Cullen, head of the Royal College of Nursing, urged members to support strike action, calling it a package that “gives billions to bankers and nothing to nurses”.
The Confederation of British Industry welcomed the package, with Director General Tony Danker saying “we have no choice but to go for growth to afford support” during the energy crisis.
However, the Joseph Rowntree Foundation said it shows the government has “no understanding of the economic realities facing millions in the UK”.
Rebecca McDonald, chief economist at the Poverty Reduction Charity, said: “This is a budget that deliberately ignores families struggling through a cost-of-living emergency and has instead focused its action on the wealthy.”
The net cost of reversing Boris Johnson and Rishi Sunak’s 1.25 percentage point increase in national insurance policies imposed in April has been estimated at around £15 billion a year.
Abolishing their planned corporate tax increase by keeping it at 19% would amount to £18.7bn a year by 2026.