As a result, the budget statement contains tax cuts worth £45billion a year and the promise of deregulation measures to speed up construction of new infrastructure and housing, increase investment in innovative businesses and productive assets and remove the cap on bankers’ bonuses.
Critics might say the most striking element of the statement is that the government is abandoning any attempt to ensure the measures are redistributive. In the opinion of Liz Truss and Kwasi Kwarteng, such concerns prevent the UK from being more competitive in attracting investment and mobile talent to the UK. Thus, we are witnessing the cancellation of the plan to increase corporate tax from 19% to 25% and the abolition of the additional income tax rate, leaving a maximum rate of 40%.
During the leadership campaign, Truss made it clear that there would be “no new taxes” and she stands by that. Indeed, it is hard to imagine her backtracking and raising taxes this side of a general election. Inheritance tax, capital gains tax (including deferred interest) and property taxes – none of these seem likely to see increases in the near future. Nor does it seem likely that the government will seek to tax non-doms more.
The approach has two major potential risks. The first is economic in terms of market reaction. The cornerstone of conservative economic thought since Margaret Thatcher has been the belief that public finances must be sustainable and tax cuts must be funded. Truss and Kwarteng take a different view, believing their policies will bring higher economic growth. Markets reacted with skepticism, with gilt yields rising and the pound at one point falling to record lows against the dollar. Market sentiment is not helped by the fact that, despite the statement involving the biggest tax cut since Anthony Barber’s ‘spur for growth’ budget of 1972, the measures have not been scrutinized by the Office for Budget Responsibility (OBR). The OBR was only created in 2010, but later played an important role in costing measures and forecasting economic performance. The OBR is due to release its forecast later this year, but the apparent lack of transparency has drawn criticism, including from Tory MPs.
There will be nervousness within the Treasury that a weakened pound will result in higher inflation which will put pressure on the Bank of England to raise interest rates further than would otherwise have been the case. . Either way, gilt yields have already risen and the government – now poised to borrow very large sums for the foreseeable future – will have to pay higher interest rates on its debt, creating new pressure on public finances.
The second major risk is political. The winners of these measures are likely to be those with the highest incomes. At a time when the cost of living is high for many, that may not sit well with many voters. It is also true that the Conservative majority in the 2019 general election depended on the support of low-income voters in post-industrial towns in the Midlands and the North of England. It is not certain that these voters will support the reductions in the additional rate or the corporation tax.
The implication of this is that, although tax hikes for wealthy individuals and families or corporations seem unlikely to the rest of this Parliament, tax policy may become more important. Labor can see there are political wins to be had here and have already announced they will reinstate the top rate of income tax. Some may also conclude that the chances of a Labor-led government after the next general election have increased.
There is no doubt that this fiscal event involves a big gamble. There will be some debate as to whether this is wise, but no doubt this is a significant shift in approach.