What we know Kwarteng’s planned tax cuts are the biggest in a generation After circumstances forced Liz Truss to enact energy price freezes for businesses and consumers, Kwarteng will now tell MPs about another part of the government’s agenda that is much more in his and the prime minister’s ideological comfort zone: tax cuts. Richard Partington has five charts which set the scene for the decisions Kwarteng will announce today. The chancellor will cancel his predecessor Rishi Sunak’s increase in corporation tax from 19 to 25%. He also announced yesterday that the 1.25 percentage point increase in national insurance will be removed on 6 November, a change that will benefit the richest households far more than the poorest. There have also been reports the government will cut stamp duty on property purchases, which highlights a tension between the Bank of England and the government, Ben Zaranko said: “The Bank is putting interest rates up because it thinks the economy is running at full capacity, and the Treasury is saying we want to go for growth.” The Bank may increase interest rates further precisely because of the tax cuts Kwarteng is promising. (This Twitter thread from Sky’s economics editor Ed Conway makes sobering reading for anyone who argues mortgage costs are just getting back to normal levels. See this explainer by Rupert Jones for more on what the rate rise means.) “This is big – it’s the biggest package of tax cuts since Nigel Lawson was chancellor in 1988,” Zaranko added. The IFS’s £30bn cost estimate “will blow away all of the fiscal headroom the government thought it had in March – it’s getting on for two-thirds of the defence budget.” ‘Investment zones’ will cut red tape but may not boost overall growth Kwarteng is also expected to announce about a dozen “investment zones” – areas where the government hopes to encourage business investment by granting firms tax relief and cutting red tape. One possible feature reported by the Guardian’s Aubrey Allegretti is the ditching of the requirement to provide affordable housing as part of construction projects. The investment zones idea is loosely based on the “freeports” already in place in some coastal areas; David Cameron had a similar “enterprise zones” project, which was quietly shelved a few years later. If you haven’t noticed either of those ideas transforming the British economy, that may be because “economists who’ve studied this tend to find it moves growth around rather than increasing it,” Zaranko said. The project has been billed as Truss’ take on levelling up, but “it isn’t a very efficient way of doing it. The government’s big-picture view has been that it doesn’t matter if growth is happening with bankers in London, because a rising tide lifts all boats. So it’s quite hard to see how this fits into that.” Borrowing will increase Given the direction of travel on tax cuts and the cost of the energy price guarantee, increased borrowing appears inevitable. The IFS suggests borrowing could be about £100bn a year by the mid 2020s – more than £60bn a year higher than was forecast in March. Few disagree that increased borrowing is justified to support the energy price freeze, and many on the left argue that one silver lining of the current crisis is that it has forced a rethink that may last beyond the current government. But borrowing to fund permanent tax cuts has to be viewed separately to emergency measures, Zaranko said. “These are big decisions that don’t just affect what we borrow this year – but for the economy’s sustainability in the medium term. Kwarteng has said he wants to see debt falling as a share of national income, and it’s hard to see how this is compatible.” |