British Chancellor Kwasi Kwarteng unveiled Friday a mini-budget in parliament comprised of a debt-financed package of £45 billion ($49 billion) in tax cuts -- the biggest round in 50 years.
Kwarteng told parliament his fiscal statement was “one of the most significant interventions the British state has ever made,” and the package would “turn the vicious cycle of stagnation into a virtuous cycle of growth.”
“This is a new approach for a new era focused on growth,” he added, saying it was based on three priorities: “reforming the supply-side of the economy, maintaining a responsible approach to public finances and cutting taxes to boost growth.”
British Prime Minister Liz Truss won the recent Conservative Party leadership race with an explicit commitment to cut taxes. Friday’s fiscal statement was the biggest tax-cutting since 1972.
The scale of the tax cuts, funded through government borrowing, while the government is already increasing spending, also funded through government borrowing, to deal with the energy crisis triggered concern among experts and financial markets.
Kwarteng said the cost of the energy bailout plan would be £60 billion in government borrowing for the first six months alone starting in October.
Tax cuts
The headline tax cut announced was the abolition of the top rate of tax, which was 45% for those earning more than £150,000 per year.
From April 2023, the top rate of tax for the highest earners will be 40%, the same for those earning £50,271.
At the other end of the tax spectrum, the 1p cut in the basic rate income tax will be brought forward by one year and take effect in April. This means the basic rate will be 19% rather than 20%.
The corporation tax will remain at 19% with a planned increase to 25% now scrapped. A planned increase in alcohol duty was also scrapped.
Stamp duty, the tax paid when people buy property, will be cut. It will be done by doubling the exemption level, the point above which it has to be paid, from £125,000 to £250,000 and from £300,000 to £425,000 for first-time buyers.
In another controversial move, Kwarteng announced a cap on bankers’ bonuses will be scrapped.
The cap, which limited bonuses to twice a banker’s salary, was introduced in 2008 by the EU following the financial crisis.
"We need global banks to create jobs here, invest here, and pay taxes here in London, not in Paris, not in Frankfurt, and not in New York," said the chancellor. "All the bonus cap did was to push up the basic salaries of bankers, or drive activity outside Europe. It never capped total remuneration, so let’s not sit here and pretend otherwise. So we’re going to get rid of it."
From November, National Insurance contributions, or social security payments, will also be cut.
Kwarteng announced his intention to create new low-tax investment zones with lower taxes for businesses and looser planning rules to encourage investment.
Those on unemployment benefits, known in the UK as universal credit, will have to take more proactive steps to find more and better paid work or face a reduction in benefits.
Trade union legislation was also tightened, with new legislation put forward to force unions to put pay offers to members to a vote.
VAT-free shopping was also introduced for overseas visitors.
Nervous reaction
The UK is facing multiple and growing economic woes. Inflation is surging, interest rates are rising, the country is thought to be tipping into recession and all those factors have contributed to and exacerbated an escalating cost-of-living crisis.
The Bank of England warned Thursday that the UK could already be in recession. It also increased interest rates, with the level now standing at 2.25%. Markets are expecting further interest rate hikes as a result of the announcement to keep inflation under control.
Following Kwarteng’s announcement, the pound sank to a 37-year low against the US dollar, with the sterling falling below $1.10 for the first time since 1985. So far this year, the pound has declined 17% against the greenback.
It also fell 1.1% against the euro and the FTSE 100 share index dropped 2.3% following the announcement.
Unlike Margaret Thatcher’s tax cuts in the 1980s, which were funded through public spending cuts, Kwarteng’s package is funded through increased government borrowing, which is an approach that has less in common with Thatcher and more with former US President Ronald Reagan.
As a result of investors selling UK government bonds, the cost of government borrowing has increased. A year ago, the two-year cost of borrowing was 0.4% - it is now 3.95%.
“This huge fiscal event is a radical economic gamble; a ‘go big or go home’ gamble that will put UK debt on an unstable footing,” Bethany Payne, a bond portfolio manager at Janus Henderson Investors, told the Financial Times.
Paul Johnson, director of the Institute for Fiscal Studies, was quoted by the newspaper as saying: “The plan seems to be to borrow large sums at increasingly expensive rates, put government debt on an unsustainable rising path, and hope that we get better growth.”
Labour Shadow Chancellor Rachel Reeves echoed those sentiments in her response to Kwarteng’s statement, saying Truss and himself were “two desperate gamblers in a casino chasing a losing run.”
"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,” said Reeves.
She added: "The Conservatives cannot solve the cost-of-living crisis, the Conservatives are the cost-of-living crisis. And the country cannot afford them anymore."
