“During the worst energy crisis in generations, this government is on the side of the British people.” Chancellor Kwarteng’s words as he delivered his mini-budget were meant to be encouraging but what’s happened since has been anything but.
Two weeks ago, the Chancellor laid out plans to bolster growth and aid economic recovery at a time when we neared recession.
Critically, he fixed energy bills to around £2,500 for the average home, paid for through public funds rather than a windfall tax on energy companies. But, more controversially, he also planned £45 billion in tax cuts without any clear plans for how all this would be paid for.
His plans included scrapping the rise in corporation tax and the 1.25% rise in National Insurance and dividend tax (from 2023). Stamp duty has been cut for properties worth less than £250,000 and 38 areas of the UK will see further tax cuts to encourage investment. He also brought forward a 1p cut in income tax, and removed the top rate of income tax, meaning those earning over £150,000 will pay the same rate as someone earning over £50,570.
Refusing the offer of a forecast from the Office for Budget Responsibility (OBR) and without any firm cuts in government spending, the new Chancellor relied on the belief that a cut in taxes for the richest will incentivise economic activity.
This was the biggest series of tax cuts since the 'Barber Boom' Budget in 1972, which ended unequivocally in disaster, and it seems that history was repeating.
Now, a day after the PM told BBC’s Laura Kuenssberg she was “absolutely committed” to cutting that 45p income tax rate, we have a U-turn.
In the days since the mini-budget, the value of the pound plummeted and this made us all poorer while also increasing the cost of importing and accelerating inflation.
As a result, interest rates for mortgages shot up, pricing many out of homes and threatening to squeeze the one million people who renew their mortgage each year. This also made the government’s cut in stamp duty potentially worthless because their mortgages will cost many movers so much more. There were also fears interest rates may have to rise to 6%.
To prevent pension funds running out of money, the Bank of England spent £65 billion trying to stabilise the market with emergency measures and, embarrassingly, the International Monetary Fund (IMF) urged the government to rethink its plans. Meanwhile, Moody’s, which sets international credit ratings, warned that the UK's rating may be downgraded next month.
Apparently, none of this was enough to convince the government to change its mind, but a rebellion from some of their own MPs at the start of the Conservative Party conference was.
Now, we wait for the main Autumn Budget on 23 November when the Chancellor (if he lasts that long) will have his next set of plans reviewed by the OBR. Meanwhile, pressure remains on the government to balance its remaining policies through freezing benefits and squeezing public services.
All considered, it’s political poison at a time when polls put Labour at their biggest lead over the Conservatives since the late 90s, but at least the value of the pound is going in the right direction again.
Please note: this article is an update following the government's U-turn. The original article can be found here.