Kwasi Kwarteng, prime minister of the United Kingdom, took a major political gamble with a tax-cut £45 billion debt financing package, bringing the pound below $1.10 for the first time since 1985.
The tax cuts package, the biggest in 50 years, includes an additional 45p tax cut for top earners and is aimed at boosting growth by increasing incentives for investment and work.
But the loan needed to finance tax cuts and energy subsidies made borrowing costs significantly higher when GBP fell to a 37-year low. Krishna Guha, vice president of Evercore ISI, said there was now “a serious risk of an all-pound crisis”.
The Institute for Fiscal Studies forecasts public borrowing will hit £190 billion this year, the third highest since the second world war and still more than £110 billion in 2026-27, ensuring that public debt burden continues to increase.
The additional loan is much more expensive for the government than it has been in the past, with two-year borrowing costs rising to 3.9% from 0.4% a year ago, as investors sold UK government bonds .
The Prime Minister has put his trust in the political destiny of the Conservatives, believing that radical tax cuts and deregulation will lift Britain’s sluggish growth rate to 2.5 per cent.
“This is a new approach to a new era centered on growth,” Kwarteng told MPs, before a Tory choir cheering and mocking from the Labor Party benches.
In contrast to previous major tax cuts in the 1980s, Kwarteng will borrow tens of billions of pounds to fund its plans, adding to demand at a time when the Bank of England interest rate hike to control inflation.
Paul Johnson, director of IFS, said: “The plan seems to be to borrow large sums of money at increasingly expensive interest rates, push government debt on an unsustainable upward path and hope that we grow. better”.
Due to more borrowing, a UK recession will now be shorter and shallower than feared, the National Institute for Economic and Social Research said. But to keep inflation in check, the BoE said it would have to raise interest rates to 5% and hold there at least until 2024.
The base rate of income tax will be cut from £20p to £19p next April and national insurance will also be cut, as will taxes on dividends. Stamp duty will be reduced to help first-time buyers and the planned tax increase will be eliminated.
The income tax relief means that an individual earning £200,000 will save almost £4,500 in 2023-24 compared to 2022-23. A worker with a salary of £20,000 will save £218.
The total cost of tax cuts in 2026-27 will be close to £45 billion. Kwarteng told MPs in a statement from the House of Commons that his aim was to turn the “vicious cycle of stagnation into a cycle of virtuous growth”.
The prime minister’s package combines tax cuts with a range of supply-side reforms that he admits may be unpopular in the short term; he insists he will be an advocate of “shameless” development.
However, he acknowledged changing the UK growth outlook “won’t happen overnight”. For the new government of Liz Truss, which took office this month, timing is of the essence as an election is expected in 2024.
Anticipating criticism that he was helping the rich too much, Kwarteng reminded MPs that the government was intervening to keep energy bills in the country and in business. He said the cost of the energy package for the first six months would be £60 billion.
Kwarteng confirmed he was removing the bankers bonus cap, a move intended to make the City of London more competitive but this left the Conservatives open to Labor claiming it was still “the party of the rich”.
Meanwhile, his lifting of a ban on shale gas exploration and his promise to overhaul environmental laws to speed up infrastructure projects has angered the green corridor.
His borrowing – which comes at a time when the cost of repaying government debt is soaring – is seen by Labor leader Sir Keir Starmer as a pivotal moment: Starmer wants to declare himself financially responsible during the election next.
Rachel Reeves, shadow chancellor, has described the Small Budget as the “final dice roll” by the Tory government after “12 years of economic failure”. She warned that government borrowing was too high and interest rates were rising.
Among other measures announced by Kwarteng, the corporate tax rate will remain unchanged at 19%, but he will maintain an 8% charge on bank profits, which will be reduced next year.
The government’s fiscal rules, which stipulate that debt must be reduced as a share of gross domestic product within three years, will be reviewed. “In due time, we will announce a medium-term fiscal plan,” Kwarteng said.