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Each policy is likely to be justified in terms of one aim: economic growth.
By Freddie Hayward
When Kwasi Kwarteng, the Chancellor, delivers his fiscal statement, or mini-Budget, on Friday 23 September he will outline a plan for the economy that will set the course for the next few years. What will he say?
Expect each policy to be justified in terms of one key aim: economic growth. Kwarteng aims to grow the economy by 2.5 per cent a year and on Friday he will publish his “Growth Plan”. This will most probably be the overarching theme of the statement.
In terms of specific policies, the government is expected to fulfil Liz Truss’s promise to cancel the planned increase in corporation tax from 19 per cent to 25 per cent. The rise, announced by Rishi Sunak in his Budget as chancellor in March last year, was only applicable to companies with profits greater than £50,000 with a taper rate up to £250,000, meaning that 70 per cent of businesses would be unaffected. Still, the Prime Minister and her new government see the increase as a barrier to growth, and hope that cancelling it will encourage private sector investment.
Kwarteng is also expected to scrap the 1.25 percentage-point rise in National Insurance announced by Sunak in March. The revenue from the tax is ring-fenced for health and social care, and the rise was sold at the time as a way to tackle the NHS backlog and fix the care system. Truss has said she won’t cut that spending and will pay for it through general taxation. The plans are estimated to save the poorest households 76p a month and the richest households £93.
Cancelling these tax rises, which Sunak had announced to avoid enlarging the national debt, signals a significant shift in policy; the Tories will no longer be so focused on fiscal responsibility and will have a much more relaxed view of borrowing.
The government is also planning to lift the cap on banker’s bonuses, according to the Financial Times. The rules, which the EU imposed in 2014, state that banks can only set bonuses at 100 per cent of bankers’ salaries, or 200 per cent if they get shareholders’ approval. The government will hope the political risk of the move will be offset by the benefits of attracting more bankers to London, which in turn could lead to higher growth.
This month the government announced an energy price cap for households that will fix the typical bill at £2,500 for two years. Truss did not set out how the plan would be paid for or how much it would cost. No 10 said these details would be published at the fiscal event on Friday.
Overall, these policies will cause the national debt to balloon. As I wrote recently, fiscal policy comprises three main levers: taxation, spending and government debt. Pull one and the other two move as well. Sunak’s aversion to higher debt combined with the need for greater spending (such as the furlough scheme and NHS funding) led to higher taxes. Truss’s aversion to tax increases combined with the need for greater spending (such as the energy price cap and defence spending) will lead to higher debt. The big gamble for Truss is that these tax cuts will lead to higher growth. If they don’t, the government will have handed billions of pounds to corporations and the rich with little to show for everyone else.
This article was originally published on 21st September and is being kept updated with the latest information.
[See also: Liz Truss faces a frosty reception at the UN]