Chancellor abolishes top rate of income tax amid raft of cuts in a mini-budget described as a huge ‘gamble’
Chancellor Kwasi Kwarteng has abolished the top rate of income tax for the highest earners as he spent tens of billions of pounds in a “gamble” designed to drive up growth during the cost-of-living crisis.
In the fiscal event - a mini-budget - he also axed the cap on bankers’ bonuses and added restrictions to the welfare system, arguing that tax cuts are “central to solving the riddle of growth”.
Treasury estimates put the cuts, including new Prime Minister Liz Truss’s promises to reverse the National Insurance rise and axe the hike to corporation tax, at a cost of nearly £45billion a year in 2026.
From April, the 629,000 earners getting more than £150,000 a year will no longer pay the top income tax rate of 45 per cent and will instead pay the 40 per cent applicable to those on over £50,271.
And he brought forward the planned cut to the basic rate of income tax to 19p in the pound a year early to April.
Mr Kwarteng also revealed his estimate that the two-year energy bills bailout will cost around £60billion over the first six months from October.
The major spending package also included:
- A cut to stamp duty, meaning 200,000 less people will pay the tax on house purchases.
- The introduce of VAT-free shopping for overseas visitors.
- Legislation to force trade unions to put pay offers to a member vote so strikes can only be called once negotiations have fully broken down.
- Confirmation of plans to make around 120,000 more people on Universal Credit take active steps to seek more and better paid work, or face having their benefits reduced.
The package came a day after the Bank of England warned the UK may already be in a recession.
The Bank this week lifted interest rates from 1.75 per cent to 2.25 per cent – the highest level for 14 years.
Mr Kwarteng said his economic vision would “turn the vicious cycle of stagnation into a virtuous cycle of growth”.
But shadow chancellor Rachel Reeves said the strategy amounts to an “admission of 12 years of economic failure” under successive Conservative governments.
The Labour MP described the Prime Minister and Mr Kwarteng as “two desperate gamblers in a casino chasing a losing run”.
By terming it a “fiscal event” rather than a full budget, Mr Kwarteng avoided the immediate scrutiny and forecasts of the Office for Budget Responsibility.
Ms Reeves said: “Never has a government spent so much and explained so little.”
On bankers’ bonuses Mr Kwarteng argued the cap to limit them to twice salaries “never capped total remuneration”, adding: “So we’re going to get rid of it”.
Tom Evennett, EY’s head of private client, said: “Over the last two days the Chancellor has delivered £22bn of tax and social security cuts for 2023-24.
“Yesterday we heard about the reduction in the increase in National Insurance contributions from 6 November and the cancellation of the Health and Social Care Levy from April 2023. Today the Chancellor went further with the announcement of the largest cuts in income tax rates for a generation, including the abolition of the additional 45p tax rate, as well as a 1p cut in the basic rate and the removal of the additional dividend tax increase of 1.25p.
“The Chancellor’s aim with these announcements is to leave more money in people’s pockets with the intention of driving economic growth. This could be considered the start of a new era - with the Chancellor hoping it is a golden one – but only time will tell as to whether these measures do drive the growth the government is hoping for.”
The Institute for Fiscal Studies (IFS) said most people will be left worse off this year despite the massive package of government support to deal with the cost of living crisis.
The leading economic think tank warned soaring prices meant a median earner will be £500 worse off in real terms than they were last year – a cut of around three per cent in their income.
In an online presentation that came ahead of the Chancellor’s mini-budget, the IFS said higher earners would be £1,000 worse – an even bigger percentage drop in their income – although those on low incomes or who are out of work will be “more shielded”.
“I am afraid that the energy price shock has made us poorer and we will be worse off. The government can spread the pain over time and between people but in the end it is not going to be able to magic it away,” said IFS director Paul Johnson.
Mr Johnson said that even though it will not be a full budget, the fiscal event was to be the biggest tax giveaway since Nigel Lawson’s budget of 1988.
In an analysis published on Wednesday, the IFS warned the government was putting the public finances on an “unsustainable path” with borrowing set to hit £100billion a year even after the energy support package has ended – more than double the official forecasts last March.
With debt potentially set on an “ever-rising path”, it said the government’s claim that reducing tax rates would lead to sustained economic growth was “a gamble at best”.
The prospect of persistent deficits in the current budget and debt rising as a share of national income meant, it said, both the main fiscal targets set in January will have been missed.
Levelling up secretary Simon Clarke acknowledged there were dangers attached to the government’s approach but insisted there were “no risk-free options” in the current global crisis.
“Having come straight out of the global pandemic and into the teeth of Russia invading western Europe, these are extraordinary times,” he told ITV’s Peston programme.
“But the real risk I think here lies in us being too passive in the face of those challenges, of accepting that we are in this economic low-growth trap.”