Chancellor Kwasi Kwarteng has been accused of “betting the house” on trickle-down economics after a “Robin Hood in reverse” budget which 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, independent economists said that almost half of his £45bn cuts will 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 FTSE100 crashing through 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 the UK may already be in a recession and raised interest rates to 2.25 per cent.
Delivering what he ended a “growth plan” after just 17 days in the Treasury, Mr Kwarteng told the House of Commons that the tax cuts and deregulation promised in 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 will benefit the 629,000 people in the UK earning over £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 £1 million annually will 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 tax payers paying more tax” by 2025/26, when Mr Sunak’s earlier freeze to 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 £110 billion 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 thinktank.
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.
“By throwing Rishi Sunak’s tax raising plans on a bonfire, the Government is taking a big gamble that growth will be ignited, to help the economy grow,” said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.
“But confidence that these unfunded tax cuts are a consistent policy for today’s inflation laden times is going up in smoke.”
Labour’s shadow chancellor Rachel Reeves liked the prime minister and Mr Kwarteng to “two desperate gamblers in a casino chasing a losing run”.
She said the government had “decided to replace leveling up with trickle down” – accusing Ms Truss of subscribing to “an ideology that says if we simply reward those who are already wealthy, the whole of society will benefit”.
Business groups gave a cautious welcome to the chancellor’s mini-Budget. But TUC general secretary Frances O’Grady said the government was “holding down wages and lining the pockets of big corporations and City bankers”, adding: “This budget is Robin Hood in reverse.”
Royal College of Nursing general secretary Pat Cullen said it gave “billions to bankers and nothing to nurses” and urged nurses to vote for strike action in an upcoming ballot.
Money saving expert Martin Lewis described the government’s “huge new borrowing” alongside huge tax cuts as “staggering”. He said: “It’s all aimed at growing the economy. I really hope it works. I really worry what happens if it doesn’t.”
Former US treasury secretary Larry Summers, who served under Bill Clinton and Barack Obama, said the UK was “behaving a bit like an emerging market turning itself into a submerging market”.
Warning that Truss’s “naïve, wishful thinking” position could push the pound below parity with the US dollar, he said the UK was pursuing “the worst macroeconomic policies of any major country in a long time”.
SNP leader and Scotland’s first minister Nicola Sturgeon said the super-rich will be “laughing all the way to the actual bank” – accusing the Tories of “moral bankruptcy”.
By billing his package as a “fiscal event” rather than a budget, the chancellor was able to avoid subjecting his figures to the rigorous analysis normally provided by the independent Office for Budget Responsibility.
But against expectations, the Treasury said that there would be no full-scale budget in November for the OBR to assess.
Treasury Select Committee chairman and Tory MP Mel Stride said that the absence of OBR forecasts left a “vast void” at the heart of the plan.
Mr Kwarteng also confirmed he was scrapping the cap on bankers’ bonuses, announced VAT-free shopping for overseas visitors and set out new requirements for 120,000 part-time people on Universal to seek more and better-paid work or face having their benefits cut.