The UK government has announced a cap on energy prices, the cancellation of a planned increased in corporation tax, and an accelerated cut to the basic rate of income tax as part of a splashy growth plan.

Chancellor of the Exchequer Kwasi Kwarteng (pictured) pledged to keep UK corporation tax at 19%, cancelling a planned increase to 25%, and reduce the basic rate of income tax from 20% to 19% next April, a year earlier than planned.

Kwarteng also scrapped stamp duty for purchasers buying homes worth up to £250,000, and up to £425,000 for first-time buyers, and reversed the 1.25 percentage point increase in National Insurance contributions.

The Chancellor abolished the 45% additional rate of tax, due to take affect from next April, meaning taxpayers with gross income of over £150,000 will pay the standard higher rate of 40%.

The tax cuts, including the stamp duty reduction, will cost £45bn by 2026-27, according to Treasury estimates.

In Association with

Kwarteng also increased the government's debt issuance for the current financial year to £72bn, causing the cost of borrowing over five years to see its biggest one-day increase since 1991.

He also announced £60bn plans to subsidise household energy bills over the next six months.

The Institute for Fiscal Studies said the tax cuts were the largest since the budget of 1972, and Kwarteng said the Office for Budget Responsibility would publish its growth and borrowing forecasts later this year ahead of the formal budget.

Markets reacted negatively to the 'mini-budget,' triggering a mass sell-off of UK short-dated government bonds. Sterling fell to below $1.11 in value for the first time in 37 years.

"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."

The opposition Labour Party said the plans were a "desperate gamble," with Shadow Chancellor Rachel Reeves declaring: "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."

The GMB Union lambasted the government for the £14bn cost of the cancelled corporation tax hike, adding that the UK was "crying out for a credible economic vision for the future.  

“We need to bring inflation under control and build a modern manufacturing base that creates good jobs at home and enhances our national security. Instead the Chancellor has chosen to pour money into the hands of rich multinationals," said Gary Smith, general secretary of GMB.

Huge fiscal gamble

Commentator Duncan Weldon, of the blog post Value Added, noted that leaving aside the energy price support – what might turn out to be the largest peacetime fiscal intervention in British economic history with an estimated cost of £60bn for the next six months – tax cuts worth £45bn by 2026/27 are the biggest tax cutting budget in decades.

“Like many others, I was expecting a large fiscal package. This was huge, well above the higher end of my expectations,” said Weldon.

Weldon’s view is that an energy price intervention that lowers the headline rate of inflation makes further tightening from the Bank of England more likely.

“The MPC are not hiking in response to high energy prices. They are hiking because core inflation is running at running at around 6% and they believe a tight labour market is generating domestic inflationary pressure,” he pointed out.

“In the MPC’s collective view the energy price support lowers headline inflation but adds to domestic inflationary pressure. That means more rate hikes.

“In the final analysis this fiscal event is a gamble, both economically and politically. The government has chosen to launch a huge demand side stimulus into an economy which has an inflation problem and where the central bank is committed to offsetting it.  

“And it’s a political gamble too. Cutting the 45% rate of tax, abolishing the bankers’ bonus cap and cancelling a rise a corporation tax during a cost of living crisis is… bold.”

Ulster says 'phew'

In Northern Ireland, the Ulster Society of Chartered Accountants welcomed retention of 19% corporate tax rate.

Chair Emma Murray said: “Maintaining the corporate tax rate at 19% reduces the risk that some companies will relocate or establish new business operations outside of Northern Ireland. The rate is still much higher than the 12.5 percent rate in operation on the other side of the border.

“A competitive rate of corporation tax, combined with the benefits of having access to both the UK and the EU’s single market for goods, puts Northern Ireland in a strong position to attract FDI, particularly in the manufacturing and distribution sectors, drive investment and expansion by local companies, and create more high-value jobs.”

In England, the Enterprise Investment Scheme Association welcomed the announcement of the extension of the UK's Enterprise Investment Scheme beyond 2025.

"The EIS is crucial to helping some of the country’s most promising start-ups secure much needed investment to grow, contributing both to employment and to the country’s economic wellbeing," said director Christiana Stewart-Lockhart.

"It is fantastic to see the Chancellor’s commitment to make ‘this a nation of entrepreneurs’. His announcements clearly outline that the government sees entrepreneurs playing a central role in the UK’s economic recovery.”

(Pic: Getty Images)