Chancellor Kwasi Kwarteng has been accused of “betting the house” on trickle-down economy after a “Robin Hood in reverse” budget that massively ramped up government borrowing to deliver the biggest tax cuts in a generation to the wealthiest in society.
After Mr Kwarteng abolished the top 45p income tax rate and reversed the 1.25 per cent increase in national insurance contributions, independent economists said nearly half of his £45bn savings went to the top 5 percent of earners would go.
His package – which required £72.4 billion in additional borrowing at a time of rising interest rates – terrified markets, with the pound falling to a 37-year low against the dollar and the FTSE 100 ahead. fell below 7,000 for the first time. since June.
And senior Conservatives sounded the alarm when former Chancellor of the Exchequer John Glen warned the Chancellor of the “irreconcilable reality” of fiscal easing at a time when the Bank of England is tightening its monetary stance in a bid to curb inflation.
The package was announced a day after the Bank warned the UK may already be in recession and raised interest rates to 2.25 percent.
After just 17 days working with the Treasury on what he called a “growth plan”, Mr Kwarteng told the House of Commons that the tax cuts and deregulation promised during Prime Minister Liz Truss’ campaign for Tory leadership were needed. to “the vicious circle of stagnation in a beneficial cycle of growth”.
He scrapped stamp duty on houses valued up to £250,000, scrapped the planned increase in corporate income tax from 19 pence to 25 pence and brought forward a cut from 20 to 19 per cent in the main income tax rate until April 2023.
Supporters hailed the budget as the largest tax cut package in 50 years.
But the Institute of 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 over the course of this parliament would win in total.
Treasury figures showed that abolishing the 45p income tax rate would benefit the 629,000 people in the UK who earn more than £150,000, averaging £10,000 a year, with profits rising the more they earn.
Torsten Bell, chief executive of the think tank Resolution Foundation, said those who earn £1 million annually will receive a £55,000 tax cut next year thanks to the broader package.
But there will be no gain for those who earn less than £12,750, and those who earn £20,000 will see an increase of just £157 from the reduction in the base rate. Only 12 percent of tax revenues go to the poorest half of households.
The Institute for Fiscal Studies said the changes would see the “vast majority of taxpayers pay more taxes” by 2025-2026, when taking into account Mr Sunak’s previous freeze on tax thresholds, and only those who have more than £155,000.
In a scathing analysis, IFS Director Paul Johnson said the plan “appears to be to borrow large amounts at increasingly expensive rates, put government debt on an unsustainable upward path and hope we get better growth.”
“Mr. Kwarteng has shown that he is willing to gamble with fiscal sustainability to push through these massive tax cuts,” Johnson said. “Mr. Kwarteng is not only betting on a new strategy, he is betting on the house.”
The IFS predicted that government bonds could remain as high as £110bn a year even after the massive energy bailout package – which was costed by Mr Kwarteng at £60bn for the first six months – expires in two years.
Future tax hikes or budget cuts will be needed to pay rising debt, the think tank said.
The city panicked in response to the surprise package, in what one analyst called “the worst day I’ve ever seen.”
At its lowest Friday afternoon, just $1.0896 could be bought for £1 – the worst exchange rate for Britons since 1985 – and the pound also fell against the weaker euro, while the FTSE 100 at one point hit a low of 6,981.5, down 2.5 per hundred on the day.
“By throwing Rishi Sunak’s tax-raising plans on the fire, the government is taking a big gamble that growth will be fueled to help the economy grow,” said Susannah Streeter, senior investment and market analyst at Hargreaves Lansdown.
“But confidence that these unfunded tax cuts are a coherent policy for today’s inflation-laden times is going up in smoke.”
Labor shadow chancellor Rachel Reeves called the Prime Minister and Mr Kwarteng “two desperate gamblers in a casino chasing a loss”. She said the government had “decided to replace leveling with trickle down” – she accused Ms Truss of endorsing “an ideology that says that if we just reward those who are already rich, all of society will benefit”.