“AT Monday, the Chancellor announced the biggest package of tax cuts in 50 years. Without even a semblance of an effort to make the public finance numbers add up. Instead, the plan seems to be to borrow large sums at increasingly expensive rates, put government debt on an unsustainable rising path, and hope that we get better growth. This marks such a dramatic change in the direction of economic policy-making that some of the longer. Serving cabinet ministers might be worried about getting whiplash. Mr Kwarteng has shown himself willing to gamble with fiscal sustainability in order to push through these huge tax cuts. He is willing to shrug off the risks of inflation, and to invite significantly higher interest rates. And he has avoided scrutiny by presenting a Budget in all but name without accompanying forecasts from the Office for Budget Responsibility. Injecting demand into this high-inflation economy leaves the government pulling in the exact opposite direction to the Bank of England, who are likely to raise rates in response. Early signs are that the markets – who will have to lend the money required to plug the gap in the government’s fiscal plans – aren’t impressed. This is worrying. Government borrowing is set on an upward path. It will reach its third-highest peak since the war, and remain at well over £100 billion, even once the energy support package is withdrawn. Public finances The Government’s costing of the Energy Price Guarantee for households and non-domestic consumers – £60 billion over the next six months. Means that borrowing this year is now on course to climb to £190 billion. At 7.5% of national income this would make it the third-highest peak in borrowing since the Second World War. After the Global Financial Crisis and the COVID-19 pandemic. By 2026-27 we now forecast that borrowing will be over £110 billion – 3.9% of GDP – which is more than £80 billion higher than the £32 billion forecast by the Office for Budget Responsibility in March. Over half of this increase in borrowing is due to the almost £45 billion a year of tax cuts announced by the Chancellor today. Our forecasts make no allowance for any top-up to spending on public service spending which might be required given the myriad pressures they face and the fact that public-sector pay awards will run at a much higher rate than assumed when the spending envelope was set a year ago. We also do not account for the most recent rises in gilt rates: the interest rate on 10-year government bonds is currently running at 0.5 percentage points higher than on just Thursday morning. A sustained increase in the cost of government borrowing of this magnitude would add £5 billion a year to borrowing. Borrowing at the rate we forecast would see debt continuing to rise as a share of national income even after the Energy Price Guarantee has expired. It is possible that economic growth will be higher than expected, either through luck or through concerted policy reforms across government. But on current policies it is more likely that, at some point, today’s tax cuts will need to be paid for by future tax rises or spending cuts. Public sector net borrowing forecast with and without Energy Price Guarantee (EPG) (23 September 2022) Underlying government debt forecast as a percentage of national income (23 September 2022) Tax cuts – the big picture ‘Mini-budget’ is anything but mini. In fact, it represents the biggest tax cut to the planned level of tax of any budget since 1972. Outdoing even Nigel Lawson’s 1988 Budget in which the top rate of income tax was reduced from 60% to 40%. Net permanent tax cuts as a percentage of GDP, relative to previous plans While the tax reductions announced in this budget are substantial. Their impact is only forecast to return the UK tax burden to 2021-22 levels – reflecting the large increases in the tax burden previously forecast for the coming years. This will mean a tax burden that remains at its highest sustained level since the 1950s. UK tax burden as a share of GDP Income tax and National Insurance Chancellor Kwarteng has announced some broad-based tax cuts that will affect tens of millions of people. One tax cut aimed very narrowly at the 600,000 people on the highest incomes. April’s 1.25 percentage point (ppt) increases to the rates of employer, employee and self-employed National Insurance contributions (NICs), and to the rates of income tax on dividends. Will be reversed from 6 November. Workers with annualised earnings above £12,570 gain from the NICs cut. The health and social care levy, which was effectively going to extend that NICs increase to workers aged over the state pension age from next April, will not be implemented. This will cost about £16 billion per year from next year. A 1ppt cut to the basic rate of income tax announced previously by then-Chancellor Rishi Sunak. From 20% to 19%, has also been brought forward by one year to April 2023. Hence income taxpayers will gain for an additional year from a tax cut worth an average of £125 per year for basic-rate taxpayers, and £377 per year for all higher-rate taxpayers. Finally, the 45% additional rate of income tax applying to incomes above £150,000 per year will (for those living outside Scotland) be abolished from April. Instead, the 600,000 people currently paying this additional rate – about 1.1% of adults – will simply pay the standard “higher rate” of 40%. The government says that cutting the top rate from 45% to 40% will cost about £2 billion per year. If no-one increased their declared taxable income in response to the change. We estimate that it would cost about £6 billion per year. Hence, the government is assuming that roughly two-thirds of the mechanical reduction in revenue is recouped due to behavioural responses. That looks like a plausible estimate, but the main thing to emphasise is the large uncertainty
