Kwarteng gambles on biggest tax cuts in half a century

Chancellor sets out £45bn package to stave off recession – but pound slumps and economists call it a ‘leap of faith’

Chancellor Kwasi Kwarteng at 11 Downing Street Credit: AP Photo/Kirsty Wigglesworth

Kwasi Kwarteng has unleashed the biggest tax cuts for half a century in a gamble on economic growth that caused turmoil on financial markets.

On his 18th day in the job, the Chancellor abolished the top rate of income tax and brought forward a reduction in the basic rate that will benefit 31 million workers.

The pound plunged to a fresh 37-year low of less than $1.09, while UK borrowing costs suffered their biggest one-day jump on record after Mr Kwarteng announced a £45bn package of unfunded tax cuts that economists described as a “high-risk leap of faith”.

Mr Kwarteng said the tax burden was “forecast to reach the highest levels since the late 1940s – before even Her Late Majesty acceded to the throne”. He said: “We need a new approach for a new era, focused on growth.”

In a decisive break with his predecessors, Mr Kwarteng cut income tax, National Insurance and stamp duty in the hope of keeping Britain out of recession and boosting competitiveness. Analysts warned it would add hundreds of billions of pounds of increasingly expensive borrowing.

Deutsche Bank claimed that the plunge in the pound, which has fallen 20pc against the dollar this year, could only be stopped by an emergency interest rate rise by the Bank of England as soon as next week to signal that it was serious about dealing with inflation.

The Chancellor rejected the suggestion that he was gambling with the economy and claimed his policies would encourage investment in the UK.

He said: “I don’t comment on market movements but what is good for the economy is creating an environment where people can come and invest in the UK and that’s exactly what we’ve done.

“What is a gamble is thinking that you can keep raising taxes and getting prosperity, which was clearly not working.”

The Treasury said cuts to the basic rate would mean average pay packets receiving a £170 boost next year.

The National Institute of Economic and Social Research said the measures would stop the economic downturn. “The announced government support measures will shorten the length of this recession,” it said, predicting that growth would return in the final months of this year.

Mr Kwarteng suggested Britain could avoid recession altogether: “It’s not a bleak picture ... I’m confident we’ve got the right policies to steer us through.”

He also confirmed the reversal of April’s 1.25 percentage point National Insurance increase from November, cancelled next April’s corporation tax rise from 19pc to 25pc, slashed stamp duty for first-time buyers, permanently increased annual investment allowance for businesses at £1m and abolished proposed tax increases on alcohol.

He also announced cuts to red tape with the simplification of planning laws designed to speed up infrastructure projects. He also announced the Government would create 40 investment zones to stimulate growth.

Economists said that the package amounted to the biggest Budget giveaway since 1972, with 660,000 people expected to be taken out of the top tax band.

Mr Kwarteng said that scrapping the top rate ensured Britain did not fall behind countries such as the US, Italy and even Norway, which have lower top tax rates than the UK.

However, panicked markets took fright at the plans to ramp up borrowing, with sterling and UK sovereign debt suffering a historic rout. Ten-year government bond yields jumped by more than 0.3 percentage points to 3.82pc, the highest level for borrowing costs in Britain since 2011.

Investors also ramped up their bets on the Bank of England responding to the fiscal bazooka with faster interest rate rises.

Markets now expect the Bank to raise interest rates by at least one percentage point at its November meeting to 3.25pc. Rates are expected to peak at above 5pc next year, causing misery for millions of mortgage holders.

Sterling plunged by almost 3.6pc against the dollar to a new 37-year low of below $1.0863, extending a freefall since Liz Truss entered office with radical economic plans.

It marked the biggest tumble in sterling since the early stages of the pandemic in 2020 as investors increasingly bet on further falls. Financial contracts indicate a 50-50 probability of the pound reaching a record low of $1.05 by the end of the year as fears of parity with the dollar mount.

Business groups welcomed the sweeping tax changes. Tony Danker, director general of the Confederation of British Industry, the UK’s biggest business group, described it as a “turning point for our economy”.

“Today is day one of a new UK growth approach. We must now use this opportunity to make it count and bring growth to every corner of the UK. Fifteen years of anaemic growth cannot be repeated,” he said.

However, Lord Hague, the former Tory leader, said unfunded tax cuts were a mistake. He said: “Those of us who supported Rishi Sunak would have taken a different approach. That was really what the argument was about, and much more cautious about big increases in deficits. And certainly, if I was the Chancellor, reducing taxes, I would reduce them more on the lower paid people.”

Analysts at Capital Economics described the package as a “gamble on growth”.

“Today’s tax-cutting bonanza is a big deal,” said Ruth Gregory, an economist at the consultancy. “The long list of tax measures adds up to a loosening in fiscal policy relative to previous plans of £44.8bn (or 1.8pc of GDP) by 2026-27. That was a bit bigger than the £30bn package we had expected.”

Mr Kwarteng has set an ambitious annual economic growth target of 2.5pc. This compares with an average of 1.8pc in the two decades before the pandemic.

Treasury analysis published on Friday showed “sustainably raising annual GDP growth” by between 0.5 to one percentage points every year could raise annual tax receipts by £23bn to £47bn by the fifth year.

Ms Gregory said: “If the Chancellor’s gamble pays off and the Government hits its 2.5pc real GDP growth then with a bigger economy comes more tax revenues and an improved fiscal position.

“However, today’s announcement feels very risky. It would not be difficult to imagine growth turning out much weaker. Without a major boost to the supply-side, today’s fiscal package just means more inflation, higher interest rates and a higher debt ratio in the future. If so, then at some point the Chancellor will need to take action by raising taxes elsewhere or cutting spending to stabilise the debt ratio.”