Chancellor Kwasi Kwarteng has been accused of “betting the house” on trickle-down economics after a “Robin Hood in reverse” Budget that massively ramped up state borrowing to deliver the biggest tax cuts in a generation to the richest in society.
After Mr Kwarteng abolished the top 45p rate of income tax and reversed the 1.25 per cent rise in national insurance contributions, independent economists said that almost half of his £45bn cuts would go to the top 5 per cent of earners.
His package – requiring £72.4bn of additional borrowing at a time of rising interest rates – spooked the markets, with the pound falling to a 37-year low against the dollar and the FTSE 100 crashing down to below the 7,000 mark for the first time since June.
And senior Conservatives voiced alarm, with former Treasury minister John Glen warning the chancellor of the “irreconcilable realities” of loosening fiscal policy at a time when the Bank of England is tightening its monetary position in a bid to rein in inflation.
The package was announced a day after the Bank warned that the UK may already be in a recession and raised interest rates to 2.25 per cent.
Delivering what he termed a “growth plan” after just 17 days at the Treasury, Mr Kwarteng told the House of Commons that the tax cuts and deregulation promised during prime minister Liz Truss’s campaign for the Tory leadership were needed to “turn the vicious cycle of stagnation into a virtuous cycle of growth”.
He scrapped stamp duty on homes worth up to £250,000, ditched the planned hike in corporation tax from 19p to 25p, and brought forward to April 2023 a cut from 20 to 19 per cent in the main rate of income tax.
Supporters hailed the Budget as the biggest tax-cutting package in 50 years.
But the Institute for Fiscal Studies said that, after taking into account tax changes introduced by Mr Kwarteng’s predecessor Rishi Sunak, only those earning £155,000 or more would gain overall over the course of this parliament.
Treasury figures showed that the abolition of the 45p income tax rate would benefit the 629,000 people in the UK earning more than £150,000 to the tune of an average £10,000 a year, with gains rising the more they earn.
Torsten Bell, chief executive of the Resolution Foundation think tank, said those earning £1m annually would get a £55,000 tax cut next year thanks to the wider package.
But there will be no gains for those earning less than £12,750, and those earning £20,000 will see a boost of just £157 from the cut in the basic rate. Just 12 per cent of tax gains go to the poorest half of households.
The Institute for Fiscal Studies said that the changes would leave the “vast majority of income taxpayers paying more tax” by 2025-26, when Mr Sunak’s earlier freeze on tax thresholds is taken into account, with only those earning more than £155,000 gaining.
In a scathing analysis, IFS director Paul Johnson said 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”.
“Mr Kwarteng has shown himself willing to gamble with fiscal sustainability in order to push through these huge tax cuts,” Mr Johnson said. “Mr Kwarteng is not just gambling on a new strategy, he is betting the house.”
The IFS forecast that government borrowing could remain as high as £110bn a year, even after the massive energy support package – costed by Mr Kwarteng at £60bn for the first six months – expires in two years’ time.
Future tax rises or spending cuts will be needed to pay for increasing debt, said the think tank.
The City panicked in response to the surprise package, in what one analyst called “the worst day I have ever seen”.
At its lowest point on Friday afternoon, £1 could buy just 1.0896 dollars – the worst exchange rate for Britons since 1985 – and sterling also fell against the weaker euro, while the FTSE 100 at one point hit a trough of 6,981.5, down 2.5 per cent on the day.
