Economists believe the Government’s tax giveaway could backfire unless it results in a wave of international investment flowing into the UK.
The mini-Budget was the largest tax-cutting event in half a century, with Chancellor Kwasi Kwarteng axing the 45 per cent tax rate for those earning more that £150,000, knocking 1p of all earners’ income tax, and reversing the national insurance hike implemented by former Chancellor Rishi Sunak less than six months ago.
The planned Health and Social Care Levy, which would have replaced the NI hike, was also scrapped.
Mr Kwarteng said the Government would maintain health and social care funding through further borrowing.
Chris Sanger, head of tax policy at Ernst & Young, believes the Chancellor and Liz Truss are relying on business-friendly tax policies tempting investment from overseas in order to stimulate growth in the economy and keep any recession to a brief period.
“This is clearly designed to have a low corporate tax rate and encourage investment,” said Mr Sanger. “So, we’ll be watching the foreign direct investment figures over the next year or so to see how things respond.
“If we see a strong level of investment then that should drive the growth that the Government is looking for.”
Mr Kwarteng also committed to launching new investment zones where stamp duty will be abolished, employment taxes slashed, planning rules relaxed and where companies will be able to write off investments in plant and machinery.
“I guess the real question on the investment areas is will they just divert investment around the UK or bring additional investment into the UK,” added Mr Sanger. “If it’s the latter then we may well see the growth that the Government is aspiring to.”
Paul Johnson, director of the Institute for Fiscal Studies (IFS), added: “Mr Kwarteng is not just gambling on a new strategy, he is betting the house.”
Mr Johnson added: “The plan seems to be to borrow large sums at increasingly expensive rates, put government debt on an unsustainable rising path, and hope that we get better growth. This marks such a dramatic change in the direction of economic policymaking that some of the longer-serving Cabinet ministers might be worried about getting whiplash.
“Mr Kwarteng has shown himself willing to gamble with fiscal sustainability in order to push through these huge tax cuts. He is willing to shrug off the risks of inflation, and to invite significantly higher interest rates.”
The IFS believes the tax cuts will lead to UK borrowing reaching £190bn in the current financial year. At 7.5 per cent of national income this would make it the third-highest peak in borrowing since the Second World War, after the global financial crisis and the Covid-19 pandemic.
By 2026-27, Mr Johnson predicts, that borrowing will be more than £110bn, or 3.9 per cent of GDP, which is more than £80bn higher than the £32bn forecast by the Office for Budget Responsibility in March.
Think tank the Resolution Foundation put the level of borrowing at £411bn over five years.
Torsten Bell, chief executive at the foundation, said: “Without significant cuts to public spending, debt will be on course to rise in each and every year. This is not what sustainable public finances look like. Every scrap of Treasury orthodoxy has been torn up.”
“This borrowing surge will mean higher GDP this winter, but it will also mean higher interest rates as the Bank of England aims to suck out the boost to demand the Chancellor has provided.
“Even those who believe lower taxes will make a major difference to growth should be cautious about putting all their eggs in that basket. After all, the tax take will remain at levels not sustained since the 1940s, even on these plans.”