Robin Hood in reverse? The mini-budget unpacked

£45bn worth of tax cuts by 2026/7. Chancellor Kwasi Kwarteng announced the biggest tax cutting event since 1972 in a ‘mini-budget’ aimed at ending the UK economy’s ‘cycle of stagnation’ and boosting growth. The IFS’s Paul Johnson noted the similarities with former chancellor Anthony Barber’s attempted a ‘dash for growth’ via tax cuts, which ultimately failed and led to stagflation. The Resolution Foundation notes that “the decision to combine the largely unavoidable higher deficit caused by rising energy prices/interest rates with permanent tax cuts will drive up borrowing by £411bn in coming years”. (NB. See NEF’s Frank van Lerven’s paper explaining when borrowing is good and when it is bad.)

• Growth via tax cuts? 'Growth is not as high as it needs to be, which has made it harder to pay for public services, requiring taxes to rise,' said Kwarteng. 'This cycle of stagnation has led to the tax burden being forecast to reach the highest levels since the late 1940s. We are determined to break that cycle. We need a new approach for a new era focused on growth'. (For more resources on the relationship between tax cuts and economic growth, read our previous digest.)
• This approach lacks evidence. Trickle down economics has been debunked, perhaps most comprehensively by analysis published by the LSE which found that tax cuts for the rich have not had a significant impact on unemployment or growth, but they have increased income inequality. IIPP’s Josh Ryan-Collins provided a thorough critique of the package as a strategy to increase economic growth: “Firstly, it is well established that tax cuts have a weaker impact on growth than public spending, as households and firms save a proportion of the new income. Second, wealthier people tend to spend a smaller proportion of any new income than poorer households, so further weakening the multiplier effect of the borrowing. Third, the major challenge facing the UK economy is a lack of public and private capital investment; and there is no evidence that cutting business or personal taxes results in more investment, employment or growth.” 

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Which taxes have been cut? 

• Income tax. The 45% higher rate of income tax has been abolished and the basic rate of income tax will be cut to 19p in April 2023 (a year earlier than planned). IPPR’s Henry Parkes calculated that the personal income tax cuts “overwhelmingly channel cash to the richest households, with nearly half (48%) going to the richest decile” and those who live in London and the South East.
• NICs. The government will cancel the increase in National Insurance Contributions in November. This was originally dubbed as the ‘Health and Social Care Levy’, branded to raise money for the NHS. However achieving the Chancellor’s key metric for fiscal sustainability (falling debt) by the mid-20s will require spending cuts of £35bn by 2026-27.
• Corporation tax. Kwarteng cancelled the planned corporation tax rise to 25% which was previously promised by ex-Chancellor Rishi Sunak. The new chancellor vowed 'we will have the lowest rate of corporation tax in the G20’, but, as the BBC’s Andy Verity notes, business tax cuts don’t necessarily lead to growth, e.g. if £18bn worth of tax cuts gets spent share buybacks rather than investments that improve productivity. Further, the Women’s Budget Group notes that this cut will largely benefit men, who are more likely to be businesses owners and shareholders.
• Investment zones. The Chancellor announced the government is “in discussions with 38 local authorities to establish investment zones in England.” These are areas with localised deregulated planning permission and lower taxes aimed to “encourage rapid development and business investment”. Fair Tax Foundation’s Paul Monaghan explained how this “mini-tax haven network” distorts local economic activity and depresses areas around the zones as firms move to exploit tax and regulatory advantages. Women’s Budget Group highlights HMT’s previous studies which showed enterprise zones only creating 32% of the jobs expected, which were mainly low-skilled.
• Stamp duty. The government raised stamp duty threshold from £125,000 to £250,000 and also increased the threshold for first-time buyers to pay stamp duty from £300,000 to £425,000 and enabled them to claim relief on properties up to a value of £625,000 (up from £500,000), partly as an attempt to prop up a housing market that is being depressed by spiralling mortgage costs. NEF’s Frank van Lerven notes that stamp duty cuts increase asset prices and make housing more unaffordable. Housing market analyst Neal Hudson notes that the previous stamp duty holidays were “a tax cut for the top end of the housing market with large numbers of investors and second home buyers also taking advantage of the savings”. IPPR’s Shreya Nanda argues replacing stamp duty with an ongoing proportional property tax would be a fairer way of building a stronger economy. Her previous paper outlines the economic benefits and explains how the political barriers could be overcome.
• Other measures. Aside from tax cuts, the mini-budget also included a number of other controversial measures. The Chancellor placed further restrictions on the right to strike, with a pledge to introduce minimum service levels and to force unions to ballot on every pay offer. There was also an announcement of further obligations on universal credit claimants to demonstrate they are seeking work or face cuts to their benefits (See our previous digest for more on the economics of sanctions). In a move welcomed by climate campaigners, the Chancellor lifted the restrictions on onshore wind development, and provided a small amount of extra money for home insulation projects.

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Responses: Tax cuts mainly benefit rich men. Many responses highlighted the distributional impact of the tax cuts being “one of the most regressive in living memory”. The Resolution Foundation calculated that almost half (45%) of the gains from personal tax cuts will go to the richest 5% alone, while just 12% of the gains will go to the poorest half of households. Women’s Budget Group have calculated that “Around 80% of those who benefit from the nearly £2.4bn a year spent cutting the 45% tax rate will be men” and that “77% of workers who earn too little to pay income tax, so will gain nothing from the nearly £5.3bn a year spent cutting the basic rate, are women.” The TUC dubbed the budget “Robin Hood in reverse”.

• Inflation and monetary policy. Financial markets appear to have lost confidence in the government, with the pound at a 37-year low against the dollar at the time of writing and yields on 10-year government debt jumping to almost 4%. IIPP’s Josh Ryan Collins notes that the collapse in the exchange rate will add even more inflationary pressure through rising import costs. The tax cuts are likely to provoke a sharper contractionary response from the Bank of England, which already increased interest rates again this week; the market is potentially predicting an unprecedented emergency hike and foreign central banks have also been applying pressure. 
• Free market think tanks in the driving seat. ConservativeHome’s Founder Tim Montgomerie called the mini-budget a “massive moment” for free market think tank, the IEA, who have been advocating for many tax cuts for years. Similarly, the CPS’s Director Robert Colvile called it a “CPS full house”. The TaxPayers’ Alliance’s John O’Connell welcomed “the most taxpayer-friendly budget in recent memory” and called on the Treasury to “get serious on spending and ensure borrowing doesn’t weigh down on generations to come.” ‍
• Public not convinced. Snap polling from YouGov gas found that the tax package is being met with scepticism by voters. 52% of voters said they thought the measures would not be effective at growing the economy, compared to just 19% who think it will lead to growth. Meanwhile only 19% of voters think the budget will leave them better off, and an overwhelming majority think that the richest in society will benefit the most. Interestingly, even a majority of Conservative voters agree with this assessment. Further polling by Patriotic Millionaires found strong support (70%) for raising taxes on extreme wealth to help cover the cost of living crisis and pay for public services, with a majority (64%) of Conservative voters also in agreement.