The new Chancellor of the Exchequer, Kwasi Kwarteng, delivered the first fiscal event of Liz Truss’ premiership this morning as part of the government’s immediate priority to tackle inflation and the cost-of-living crisis. Kwarteng has spent the last week denying that the ‘Plan for Growth’ was a ‘Budget’; but will have a hard time making that case now given the sheer size of the package he has introduced.
This is shock therapy for the economy and the government’s dual aims could not be clearer. First, growth must be stimulated to increase the size of the pie available to the British people and the government to increase living standards. The government has set itself a target of 2.5% annual growth. Second, the government must alleviate the cost of living for ordinary people.
The increase in National Insurance brought in by Boris Johnson’s government in the Spring has been cancelled with no reduction in the funding it was designed to provide for the NHS. Meanwhile, the top rate of income tax (45% of all earnings over £150,000) has been abolished in its entirety and the plan to reduce the basic rate of income tax from 20% to 19% has been brought forward by a year to April 2023.
Further measures for households and businesses that are designed to stimulate growth include:
- The cancellation of a planned increase in Corporation Tax from 19% to 25%
- The lifting of caps on bankers’ bonuses to attract business and additional taxation to the City of London
- VAT-free shopping will be introduced for overseas visitors to stimulate international spending
- The threshold before people start to pay Stamp Duty, a tax applied directly on the sale of property, has been doubled from £125,000 to £250,000. First time buyers will also only pay Stamp Duty on purchases exceeding £425,000.
The chancellor also confirmed the plans to cap energy prices announced by Liz Truss prior to the passing of HM The Queen. Unit prices for both gas and electricity will be capped for households and businesses to ensure the typical annual household bill does not exceed £2,500. The government anticipates in the first instance that the measures will cost the Exchequer approximately £60bn and reduce inflation by 5%.
Liz Truss has sat in the Cabinets of all three previous Conservative prime ministers and decided that what she has seen so far has not worked. The Growth Plan amounts to a significant departure from the Conservative economic orthodoxy of the last 12 years and that this has not delivered anywhere near the levels of economic growth Truss wants to see. It is also a gamble on behalf of the chancellor and the prime minister who know that the opposition will focus on tax cuts for the rich at a time of declining living standards but know that if growth does get going then Labour’s arguments will dissipate.
The consequence is that the battle lines are clearer between the Conservatives and Labour than at any point in the last 30 years. The next election will almost certainly be a fight between the idea of Conservative ‘growth’ versus Labour ‘fairness’. Truss and Kwarteng’s conviction on small-state economics will make it easier for them to genuinely fight for their vision.