Britain enters new economic era

So much for a “mini budget”. Britain has entered “a new era” according to Kwasi Kwarteng in parliament today, as he unveiled the most radical tax cuts in half a century.

The new chancellor has pledged to cut £26 billion of tax and cancelled over £18 billion of future tax rises planned by Rishi Sunak.

The central aim of these bold measures it to turn a “vicious cycle of stagnation into a virtuous circle of growth.” According to Kwarteng, the government’s plan should generate economic growth of 2.5% a year.

Some of the announcements were already confirmed – such as the plan to freeze energy bills at £2,500 for a typical household. Other budget content was anticipated – such as the scrapping of the banker bonus cap, the scrapping of the planned National Insurance tax and corporation tax rise, as well as the stamp duty cut to boost the property market.

Then there was the big surprise announcement: Kwarteng has caused quite the stir by announcing that the 45% additional rate income tax band for those earning over £150,000 will be scrapped entirely. There had been rumours. They were true.

“We won’t apologise for managing the economy in a way that increases prosperity and living standards,” said the Chancellor.

But better living standards for who?

Critics of the mini-budget say these tax cuts will do little to help those at the very bottom of society, although the energy bailout will. Meanwhile, the top 1% of earners – the 660,000 people who earn more than £150,000 – will now benefit by an average cut of £10,000 a year. When it comes to scrapping the NI levy, for instance, the poorest 10 per cent of households will gain all of £11 in 2022-23, according to the Resolution Foundation, while the richest 10 per cent will gain £682 on average.

Critics also fear the plan is a reckless one.

Labour’s Rachel Reeves has likened the PM and her chancellor to “two desperate gamblers in a casino, chasing a loosing run.”

To fund the plans, the Treasury will borrow an additional of £72 billion relative to April.

This has spooked the markets. Following the announcement, Sterling fell below $1.10 for the first time since 1985, before later dropping to around $1.09 — one of the top ten worst days for the pound since 2004.

Kwarteng has thrown out 12 years of Tory establishment economic orthodoxy today, putting the country on an uncertain path. Some have jibed that Britain is now a laboratory for the IEA. Truss’s favourite think-tank has come out strongly in favour of the plan, insisting the high tax pathway we’ve been on since 2008 clearly isn’t working, and it’s time to shake things up.

Doug McWilliams has predicted in Reaction today that the measures will indeed lead to higher GDP – and boost the economy by more than 2% by 2030. Though a recession likely won’t be avoided in the short-term.

This is a punchy set of measures. The government and the Bank of England will be watching the markets nervously next month.

The upside effects of this “mini-budget” will likely only come through over the next few years. Truss will have to hope the turbulence before then is not so extreme that the Tories lose confidence in another of their leaders.