The mini-budget, announced on 23rd September 2022 by the Chancellor of the Exchequer, had sent the pound plummeting and borrowing costs spiralling, forcing the Bank of England to make a £65bn intervention in the bond market.
On Monday 3rd October, Kwasi Kwarteng back-tracked, scrapping the planned abolition of the 45p rate of income tax – a policy which would have benefited those earning more than £150,000, and which was seen as totemic of a vastly dispassionate and muddle-headed government.
The Chancellor published a retraction on Twitter, saying: “From supporting British business to lowering the tax burden for the lowest paid, our Growth Plan sets out a new approach to build a more prosperous economy. However, it is clear that the abolition of the 45p tax rate has become a distraction from our overriding mission to tackle the challenges facing our country. As a result, I’m announcing we are not proceeding with the abolition of the 45p tax rate. We get it, and we have listened.
This will allow us to focus on delivering the major parts of our growth package. First, our Energy Price Guarantee, which will support households and businesses with their energy bills. Second, cutting taxes to put money back in the pockets of 30 million hard-working people and grow our economy. Third, driving supply side reforms – including accelerating major infrastructure projects – to get Britain moving.”
The abolition of the 45p tax rate constitutes an attempt on the part of the Chancellor to restore fiscal credibility, although the reversal may well damage the prime minister’s authority – an unsavoury possibility, especially with a general election on the horizon.
Indeed, cabinet indiscipline is at a level not usually seen during the first heady days of a premiership. For example, the Work and Pensions Secretary, Chloe Smith, broke ranks at the Conservative Conference, saying, “protecting the most vulnerable is a big priority for me.” Meanwhile, Leader of the Commons, Penny Mordaunt, told Times Radio, “I’ve always supported – whether it’s pensions, whether it’s our welfare system – keeping pace with inflation. It makes sense to do so.”
Nevertheless, investors bought sterling and UK government bonds following the policy reversal on Monday morning, and by the afternoon, the pound had returned to its previous pre-budget levels.
However, Truss and Kwarteng must still explain how their high-spending, low-tax agenda will be funded – after all, restoring the 45p rate of income tax will only save between £2bn and £3bn a year. And the hard-nosed duo may well come under pressure to reverse the other proposed unfunded tax cuts, including a £17bn plan to reverse a corporation tax rise – a policy that businesses leaders have dismissed as a low priority. Indeed, for firms up and down the country, worries remain, as business leaders demand lower rates of VAT and longer-term energy assurances.
With Kwarteng’s medium-term fiscal plan and forecasts from the Office for Budget Responsibility expected in a month, we will soon see whether Truss’ and Kwarteng’s supply-side economics can deliver the much-promised annual growth target of 2.5%.
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