Kwasi Kwarteng slashed taxes by £45 billion on Friday in a huge gamble to ramp-up growth before the next general election.
The 6ft 5in Chancellorswung his axe at income tax, National Insurance, corporation tax and stamp duty in a historic mini-budget aimed at transforming Britain’s lacklustre growth rate.
Most eye-catching was scrapping the top 45p rate of income tax, as well as lopping 1p off the basic rate from next April to reduce it to 19p in the pound, one year earlier than planned, with 31 million people set to benefit from the change.
Unveiling the biggest tax cuts since 1972, he told the Commons: “We are at the beginning of a new era. For too long in this country, we have indulged in a fight over redistribution. Now, we need to focus on growth, not just how we tax and spend. Our duty is to make the UK one of the most competitive economies in the world.”
But as the Government went on a borrowing and debt splurge to fund the tax-cutting bonanza and deal with the energy bills crisis, the pound plunged amid a febrile mood in the markets. Mr Kwarteng, though, pressed ahead, laying out clear battle lines for the next election and:
* Reversed April’s National Insurance hike of 1.25 percentage point from November 6. He stressed the tax cut would mean 28 million people across the UK will keep an extra £330 a year, on average, in 2023-24. It would also reduce 920,000 businesses’ tax liabilities by £9,600 on average.
* Binned his predecessor Rishi Sunak’s planned increase in corporation tax from 19 per cent to 25 per cent next year. The Chancellor emphasised: “That’s £19 billion for businesses to reinvest, create jobs, raise wages, or pay the dividends that support our pensions.”
* The tax cut plans will cost £45 billion by 2026-27, said Treasury documents.
* Axed the cap on bankers’ bonuses and pledged an “ambitious package of regulatory reforms” to boost the City.
The Treasury said that as a consequence of Friday’s measures and earlier support packages to help ease energy bills, the Government would look to raise a further £72 billion in debt to cover the cost of the packages.
But before the Chancellor began speaking the pound had been taking a battering on the foreign exchanges. By shortly before 11am, sterling was down 1.61 cent at $1.104 and the FTSE-100 index was off 1.5 per cent or 111 points.
Gilts fell on concerns about a huge increase in public borrowing. The yield on the five-year gilt was up half a percentage point, the biggest rise on record. Economists have warned that the tax-cutting bonanza could fuel inflation which could force the Bank of England to raise interest rates, possibly towards five per cent.
Such an increase would mean many homeowners, including some who borrowed large sums when interest rates were low, being hit with soaring mortgage bill payments.
The Bank, which said Britain may already be in recession, signalled yesterday that it was prepared to act decisively if needed to control inflation, which is now expected to peak at around 11 per cent later this year, lower than previously forecast after the Government energy support package to keep down bills.
Tearing up Treasury “orthodoxy,” Mr Kwarteng’s radical blueprint for growth involved more than 30 measures.
In a rabbit-out-the-hat at the end of his 24-minute speech, he told MPs: “Take the additional rate of income tax. At 45 per cent, it’s currently higher than the headline top rate in G7 countries like the US and Italy and it is higher even than social democracies like Norway. But I’m not going to cut the additional rate of tax today, I’m going to abolish it altogether.”
Cutting the basic rate to 19p from April 2023, he added: “That means a tax cut for over 31 million people in just a few months’ time. That means we will have one of the most competitive and pro-growth income tax systems in the world.”
Hundreds of thousands of Britain’s most wealthy people, earning more than £150,000, are expected to benefit from the axing of the 45p rate, on average by £10,000.
But shadow chancellor Rachel Reeves said that the Prime Minister Liz Truss and the Chancellor were like “two desperate gamblers in a casino chasing a losing run”. Ministers left themselves exposed to accusations that they were favouring the wealthy over the less-well-off.
But Mr Kwarteng ploughed on with his landmark reforms, axing the cap on bankers’ bonuses brought in to avoid another financial crash.
He said: “We need global banks to create jobs here, invest here, and pay taxes here in London, not Paris, not Frankfurt, not New York.”
Taking on the unions, the Chancellor said the Government would legislate to require them to put pay offers to a member vote, to ensure strikes can only be called once negotiations have “genuinely broken down”.
In a boost for London’s high-end shops, VAT-free shopping will be introduced for overseas visitors.
The struggling hospitality sector will see planned increases in the duty rates for beer, cider, wine and spirits cancelled. Mr Kwarteng announced 38 investment zones, including at least one in London, in his drive to boost the UK’s trend growth rate to 2.5 per cent.
