The UK chancellor has introduced the biggest set of tax cuts for half a century as Liz Truss’s government aims to jolt the economy back to life in what businesses are describing as a “turning point” for the economy.
The UK chancellor Kwasi Kwarteng has introduced a huge swathe of tax cuts aimed at boosting economic growth in a mini budget that has been broadly welcomed by business as a chance to move on from years of low productivity and poor growth.
Speaking to MPs in the House of Commons this morning (23 September), Kwarteng introduced a “new approach for a new era focused on growth”. That approach includes reductions in income tax, national insurance and corporation tax with the aim of boosting economic growth to 2.5%, although a timescale for when this will be achieved has not been given.
Stamp duty has also been cut, while planned increases in duty on beer, cider, wine and spirits have been axed. The cap on bankers’ bonuses has been scrapped and a ban on shale gas fracking lifted.
Tony Danker, director general of the Confederation of British Industry, welcomes the new strategy, describing it as a “turning point for our economy”. He points to the war in Ukraine and the energy crisis as reasons why the UK must prioritise growth, in part to pay for cuts to energy bills that aim to protect both business and consumers.
“Today is day one of a new UK growth approach,” he says. “We must now use this opportunity to make it count and bring growth to every corner of the UK.”
The details of the government’s tax cuts
The mini budget saw Kwarteng bring forward a planned 1p cut in the basic rate of income tax from 2024 to next year, dropping the rate to 19%. The government is scrapping the 45p income tax rate on earnings of more than £150,000 per year, meaning the highest rate will be 40p.
The rise in national insurance of 1.25 percentage points that was introduced earlier this year will be reversed from 6 November. And the planned rise in corporation tax from 19% to 25% that was due to take place next year has been cancelled.
The Institute for Fiscal Studies (IFS) has estimated the cuts will cost £41bn in 2024 and £45bn in 2026, making them the “biggest tax-cutting event since 1972”. That round of cuts by the chancellor at the time Tony Barber is widely seen as a disaster.
But business is on board with the plan and expects to see more from the government. Describing the announcements today as a “bold start”, the director general of the British Chambers of Commerce, Shevaun Haviland, hopes they will act as a springboard to a long-term economic strategy.
“Business across the UK will enthusiastically welcome the Chancellor’s pledge to focus on economic growth and speed up new infrastructure development,” she says. “The chamber network is a great believer in giving firms the tools and support they need to create the wealth that funds government tax revenues.”
Introducing ‘investment zones’
She also welcomes news of new “investment zones”. Businesses will receive substantial tax cuts and fewer restrictions on building in these areas, with the government currently in talks with 38 local authorities across England on the plans.
These include “accelerated” tax reliefs for 10 years for structures and buildings, and full tax relief on investment in plants and machinery. Land and buildings bought in these zones will not be subject to stamp duty, while business rates will not apply for newly occupied premises and employers will not pay national insurance contributions on the first £50,000 of staff salaries.
Haviland says: “The introduction of investment zones has the potential to finally deliver on the government’s long-standing promise to level up, if the scheme is truly UK-wide. Lessons also need to be learned from the past, it will be crucial to get these zones right from the start, otherwise they can simply displace growth and investment from one area to another without creating new economic activity.”
Areas interested in becoming investment zones include Liverpool, Greater Manchester, Sunderland, Southampton, Essex and Somerset.
The government also plans to kickstart a number of infrastructure projects including the Hinkley Point C and Sizewell nuclear energy sites and Cambo Phase 1 oil field. The aim is to have as many as possible under construction by the start of 2023.
Small businesses have also welcomed the announcements, with Martin McTague, national chair of the Federation of Small Business, saying the Truss government is ”off to a flying start”.
”The chancellor has delivered pro-small business measures today and has rightly recognised that removing taxes on jobs, investment and entrepreneurs is essential for our economy,” he adds.
“Ministers need to be relentless in removing barriers to small business success – especially with the current headwinds. The government has today signalled its determination to back small firms and we look forward to working with ministers and departments to put in place measures to help small businesses grow and succeed.”
Concerns over the scale of the cuts
However, the mini budget has also had its critics. The Office for Budget Responsibility is yet to examine the plans and there are concerns over the level of borrowing that will be needed to pay for the cuts, particularly given that the Bank of England warned only yesterday that the UK economy is likely already in recession.
It raised interest rates by 0.5 percentage points to 2.25% in a bid to stem inflation, which is running at a 40-year high, with further increases highly likely. Tax cuts could add to the inflationary environment.
The IFS says borrowing is likely to run at more than 3% of GDP in the mid-2020s despite the government’s target legislated in January – that debt should be falling as a percentage of GDP by year three of its forecast.
Meanwhile, the value of the pound has plummeted to a 37-year low, falling by 3% to below $1.10. It also dropped against the euro, to €1.13, while equity markets fell and the FTSE 100 declined to its lowest level in two months.
The Resolution Foundation has raised concerns about the unequal nature of the cuts, with almost half the gains set to go to the richest 5%, according to its analysis. For example, it claims that someone earning £200,000 a year will gain £5,220 from the budget, while someone earning £20,000 will gain just £157.
Unions have also condemned plans to place new restrictions on strike action. In his speech to MPs, Kwarteng said the government would introduce minimum service levels during strikes and legislate to require unions to put pay offers to a member vote. But unions have said government should focus on working towards settlements rather than making it harder to take action.
Nevertheless, analysts at PwC believe the budget will have drawn the attention not just of UK businesses but those globally. Stella Amiss, regional tax leader at PwC, says: “The government has proven willing to forge a new path by breaking current trends and introducing substantial tax cuts in the middle of a volatile economic landscape. The eye-catching and, in the case of the new 40% single rate of higher tax, unexpected nature of the reforms announced today show that the Chancellor wants the UK to be noticed.”