FINANCIAL markets reacted swiftly today after the Chancellor announced a huge package of tax cuts that he hopes can kickstart growth.
The abolition of the 45p additional rate tax band and a quicker cut in the basic rate from 20p to 19p from next April were among several headlines from the government’s ‘Growth Plan’ – a set of tax and spending measures announced without the economic forecasts and impacts assessments that would typically be published alongside a more conventional Budget.
The yield on 10-year UK government bonds – or ‘gilts’ – rose from around 3.25% to above 3.75% in the moments after the plans were announced by Kwasi Kwarteng, the new Chancellor of the Exchequer. That means the market is demanding a higher return in order to lend to the UK government via the bond market.
At the same time, the value of the pound fell to reach $1.11 against the US dollar. That means the UK faces even more imported inflation because sterling is worth less in overseas currencies.
Many of the plans confirmed today had been leaked in recent days. There will be cuts to stamp duty for residential property purchases, with the threshold at which the tax is paid doubled to £250,000 for all home purchases. The threshold at which first-time buyers begin to pay stamp duty will increase from £300,000 to £425,000, and the maximum value of a property on which first-time buyers’ relief can be claimed will also increase from £500,000 to £625,000.
Meanwhile, the planned increase in the rate of corporation tax from 19% to 25% will now not go ahead and the 1.25% extra National Insurance surcharge imposed under the leadership of Boris Johnson has also been scrapped. New low-tax, low-regulation zones will be developed where businesses will be given incentives to set up and employ staff.
The government is betting that an historically large package of tax cuts can jolt the UK economy into a higher rate of long-term growth. That growth will be needed if the Chancellor hopes to balance the books because the plans announced today require a substantial increase in borrowing to pay for them. The only revenue-raising measures mentioned by the Chancellor today was a squeeze on those claiming Universal Credit.
In the near term, as confirmed by the Bank of England yesterday, the UK appears to be in recession so it is not a surprise to see the government pushing policies it believes will boost economic activity. The arguments will surround whether the measures today most effectively achieve that.
A lot of attention is bound to fall on the fact that the biggest winners appear to be high-earners with incomes above £150,000, and whether any uptick in growth will be enough to recoup the huge amounts the government is borrowing. The cuts to stamp duty have been tried before and, while boosting property market activity, lead to higher house prices so buyers tended not to save money overall.
The government will be able to shake off such concerns if growth comes through quickly and borrowing remains under control. The coming months will be crucial in determining whether that happens.