Financial markets ‘spooked’ as Chancellor Kwasi Kwarteng takes £45bn punt on kick-starting UK growth and offers Investment Zones for Liverpool city region and Cheshire. Tony McDonough reports
Chancellor of the Exchequer Kwasi Kwarteng unveiled “the biggest tax cutting budget in half a century” on Friday in a £45bn gamble on growth.
In a move seen as either courageous or foolhardy, depending on your political perspective, new Prime Minister Liz Truss has bet the farm on stimulating the supply side of the UK economy.
However, the financial markets were not impressed. Following Mr Kwarteng’s speech to the House of Commons, the pound fell against the dollar from an already low level of $1.12 closer to $1.09.
His speech also has a significant impact on the bond market, where the Government borrows. The two-year cost of Government borrowing has already increased from 0.4% to 3.9% over the past year and it now looks certain to rise further.
Paul Johnson, director of the Institute for Fiscal Studies (IFS) said it was “the biggest tax cutting budget in half a century… Extraordinary”.
He added: “£45 billion of tax cuts. This is the biggest tax-cutting event since 1972. Barber’s ‘dash for growth’ then ended in disaster. That Budget is now known as the worst of modern times. Genuinely, I hope this one works very much better.”
READ MORE: At-a-glance guide to the mini Budget
The Chancellor offered across-the-board income tax cuts that he hopes will act as an economic stimulus. However, critics say wealthy people will benefit much more than those on lower incomes. The basic rate of income tax is cut from 20p to 19p. The 45% top rate of tax is abolished with the highest rate now 40%.
A cap on the bankers’ bonuses has been lifted and a planned rise in corporation tax has also been scrapped. An increase in National Insurance payments has been reversed.
In a boost for homebuyers the stamp duty rate for England and Northern Ireland was raised to £250,000. For first-time buyers the threshold is £425,000. However, with new homes supply still constrained there are fears this will simply push up house prices further.
In what could be good news locally, he announced new low-tax investment zones in 38 local areas across the UK. Those areas include Liverpool city region, which is already about to see the launch of a Freeport, and Cheshire.
Businesses in designated areas in investment zones will benefit from 100% business rates relief on newly occupied and expanded premises. Local authorities hosting Investment Zones will receive 100% of the business rates growth above an agreed baseline in designated sites for 25 years.
Companies will also receive full stamp duty land tax relief on land bought for commercial or residential development. And they will benefit from a zero rate for Employer National Insurance contributions on new employee earnings up to £50,270 per year.
To incentivise investment there will be a 100% first year enhanced capital allowance relief for plant and machinery used within designated sites and accelerated Enhanced Structures and Buildings Allowance relief of 20% per year.
Click here for more details on the Investment Zones
Paul Cherpeau, chief executive of Liverpool Chamber, said: “Businesses will be pleased to see the government bring forward measures to tackle the short-term causes of inflation with a long-term approach to boost investment and raise confidence.
“Investment Zones offer perhaps the largest signal of the Government’s new direction, with the opportunity for businesses to pay lower taxes and business rates in specific areas.
“We hope the Liverpool city region will benefit from any further opportunities to support growth and investment.”
David Parkin, director of the £47bn North West HyNet hydrogen project welcomed the new zones and the Chancellor’s comment that the project is to be accelerated for “as fast as possible” delivery.
Carl Williams, a North West partner at accountancy firm Grant Thorton said Investment Zones “could be a good way of stimulating growth in the areas that most need it”. However, he also warned they “run the risk of creating a two tier economy within our region”.
Michael Sandys, Liverpool city region area leader for the Federation of Small Businesses, said: “FSB looks forward to working with the Government, Liverpool City Region Combined Authority and the small business community to make investment zones a success, and to ensure that they work both for the small firms already working in these areas, and new small firms starting up.”