Britain’s new finance minister Kwasi Kwarteng said on Friday he would scrap the country’s top rate of income tax and cut the basic rate next April – a year earlier than expected – to spur economic growth.
Kwarteng said from April 2023 Britain would have a single higher rate of income tax of 40 per cent, scrapping an additional rate of 45 per cent on income over £150,000 ($168,000).
He also said he would cut the basic rate of income tax to 19 pence in April 2023, one year earlier than expected.
“That means a tax cut for over 31 million people in just a few months’ time,” he told parliament. “That means we will have one of the most competitive and pro-growth income tax systems in the world.”
Investors unloaded short-dated British government bonds as fast as they could, with the cost of borrowing over 5 years seeing its biggest one-day rise since 1991, as Britain raised its debt issuance plans for the current financial year by £72.4 billion($81 billion). The pound slid below $1.11 for the first time in 37 years.
Kwarteng’s announcement marked a step change in British economic policy, harking back to the Thatcherite and Reaganomics doctrines of the 1980s that critics have derided as a return to “trickle down” economics.
“Our plan is to expand the supply side of the economy through tax incentives and reform,” Kwarteng said.
“That is how we will compete successfully with dynamic economies around the world. That is how we will turn the vicious cycle of stagnation into a virtuous cycle of growth.”
A plan to subsidise energy bills will cost 60 billion pounds just for the next six months, Kwarteng said. The government has promised households support for two years as Europe wrestles with an energy crisis.
Tax cuts – including an immediate reduction in the Stamp Duty property purchase tax plus a reversal of a planned rise in corporation tax – would cost a further 45 billion pounds by 2026/27, he said.
The government said raising Britain’s annual economic growth rate by 1 percentage point over five years – a feat most economists think unlikely – would increase tax receipts by around the same amount.
Britain also will accelerate moves to bolster the City of London’s competitiveness as a global financial centre by scrapping the cap on banker bonuses ahead of an “ambitious deregulatory” package later in the year, Kwarteng said.
The opposition Labour Party said the plans were a “desperate gamble”.
“Never has a government borrowed so much and explained so little… this is no way to build confidence, this is no way to build economic growth,” said Labour’s finance spokeswoman Rachel Reeves.