Pound plummets as chancellor unveils biggest 'tax cutting event since 1972'
What measures did the chancellor announce and what do they mean for the country? ITV News Deputy Political Editor, Anushka Asthana, reports
The pound has plummeted to a fresh 37-year low against the dollar, in the wake of Chancellor Kwasi Kwarteng’s mini-budget in which he unveiled the "biggest tax cutting event in half a century".
The chancellor described his economic plans as "one of the most significant interventions the British state has ever made", in which he introduced wide-ranging measures to fulfill Liz Truss’s promises of tax cuts and economy growth through spending tens of billions of pounds.
But after Mr Kwarteng's announcement sterling declined as low as £1 which could buy just 1.0896 dollars - the worst exchange rate for Britons since 1985, with one analyst saying it was "the worst day I have ever seen".
Among the measures revealed, the chancellor said he will slash the top rate of income tax for the wealthiest in the country and remove the cap on bankers’ bonuses.
Normally a falling pound is good for the FTSE 100, as it makes it cheaper for people outside the UK to buy British-made products, but Friday was not a normal day.
“This is not supposed to happen in advanced countries: we expect deficit spending to drive up interest rates and make the currency rise, which is what happened under Reagan,” said Paul Krugman, a US economist who won the Nobel Prize in 2008.
He added: “But Britain is now trading like a developing country, where perceived fiscal irresponsibility is undermining confidence in the value of its currency.”
During his so-called mini-budget - which also added further restrictions to the welfare system - Mr Kwarteng argued his plan will “turn the vicious cycle of stagnation into a virtuous cycle of growth”.
Critics have hit out describing it as a "budget for the wealthy", while experts called it a "gamble" and raised concerns over the extra £45 billion the government will have to borrow to pay for the cuts.
Around an extra £60 billion will also need to be borrowed to pay for the energy bill bailout for households and businesses over its first six months from October.
Trade unions have told ITV News the mini-budget is a 'recipe for inequality and hardship on steroids'
Other measures announced included a cut stamp duty, meaning 200,000 fewer people per year will pay the tax on house purchases.
In a bombshell announcement, Mr Kwarteng said he will "abolish" the 45% higher rate of income tax for the 629,000 in the country who earn over £150,000 per year.
This means that from April, the top earners will pay just 40% in income tax - the same amount that those earning over £50,271 per year pay.
The planned cut to basic rate income tax of 1p will also be brought forward by a year. This will come into effect in April 2023, meaning tax will be cut from 20% to 19%. On average, that is a saving of £14 per month for 31 million people.
The key announcements in the chancellor's mini-budget:
Top income tax rate of 45% for the biggest earners in the country to be scrapped
A cut to stamp duty - meaning the exemption level was immediately doubled from £125,000 to £250,000 and from £300,000 to £425,000 to first-time buyers
Planned cut of 1p to basic rate income tax brought forward by a year to 2023
Cap on bankers' bonuses to be removed
National Insurance to be cut from November
New low-tax “investment zones” with tax breaks for businesses
Planned increase on corporation tax to be axed and to remain at 19%
Stricter rules for those on Universal Credit - they must take active steps to seek more and better paid work, or face having benefits reduced
The introduction of VAT-free shopping for overseas visitors
Legislation to crack down on strikes forcing trade unions to put pay offers to a member vote
Planned increase on alcohol duty to be axed
The package was announced a day after the Bank of England warned the UK may already be in a recession and lifted interest rates to 2.25%.
Mr Kwarteng has been under pressure to deliver solutions quickly as he entered his role at time when the UK is facing an escalating cost of living crisis, a recession, soaring inflation and rising interest rates.
He told the Commons that his "growth plan" will bring a "new era" for the country, which will be "built around three priorities: reforming the supply-side of the economy, maintaining responsible approach to public finances, and cutting taxes to boost growth.”
But doubt was raised by experts who called his plans a risk, while the shadow chancellor Rachel Reeves described Mr Kwarteng and Ms Truss as “two desperate gamblers in a casino chasing a losing run”.
"The chancellor has made clear who his priorities are today, not a plan for growth - a plan to reward the already wealthy," she added. "A return to the trickle-down of the past - back to the future, not a brave new era."
"The Conservatives cannot solve the cost of living crisis, the Conservatives are the cost of living crisis. And the country cannot afford them anymore," she added.
ITV News Political Editor Robert Peston analyses the potential risks and rewards of the chancellor's mini-budget
Labour MP John McDonnell called it "the most socially-divisive budget in a generation".
The Resolution Foundation calculated that almost two-thirds of the gains from the personal tax cuts will go to the richest fifth in the country, while just 12% will go to the poorest.
The director of the Institute for Fiscal Studies (IFS), Paul Johnson, told ITV News the plans are a "big gamble" both with public finances and inflation as he raised concerns.
He said the "extraordinary" budget was the "biggest tax cutting event since 1972" as he referenced the budget that year of former Tory chancellor Anthony Barber, who served under Edward Heath's administration and made major tax cuts.
"Barber's 'dash for growth' then ended in disaster. That Budget is now known as the worst of modern times," he added in a tweet. "Genuinely, I hope this one works very much better."
He said the chancellor has made the plans “without even a semblance of an effort to make the public finance numbers add up” and "we heard nothing on public spending".
“Early signs are that the markets - who will have to lend the money required to plug the gap in the government’s fiscal plans - aren’t impressed. This is worrying," he added in a statement.
“Government borrowing is set on an upward path. It will reach its third-highest peak since the war, and remain at well over £100 billion, even once the energy support package is withdrawn."
By calling it a “fiscal event” rather than a full, official budget, Mr Kwarteng avoided the immediate scrutiny and forecasts from the Office for Budget Responsibility (OBR) - meaning the estimations are solely based on the Treasury's calculations.
There was also some anxiety in the Tory party, with Treasury Select Committee chairman Mel Stride saying there was a “vast void” created by the lack of OBR forecasts.
Conservative former cabinet minister Julian Smith has said the chancellor’s decision to hand a “huge” tax cut to the wealthy was “wrong”.
"In a statement with many positive enterprise measures this huge tax cut for the very rich at a time of national crisis & real fear & anxiety amongst low income workers & citizens is wrong," he tweeted.
Money Saving Expert Martin Lewis described the announcement as "staggering", tweeting: "Huge new borrowing at the same time as cutting taxes.
"It's all aimed at growing the economy. I really hope it works. I really worry what happens if it doesn't."
Ahead of his budget, the chancellor had already announced a reverse on the national insurance hike, introduced by his predecessor Rishi Sunak in April, to tackle the mammoth backlog in health and social care.
Scrapping the 1.25% of national insurance, would save someone on a £25,000 per year salary £15.50 per month.
In further plans revealed on Friday, the chancellor said the planned rise to corporation tax has been axed and will remain at 19%, along with a planned increase on duty rates for beer, cider, and spirits, while VAT-free shopping will be introduced for overseas visitors.
He also confirmed the government will create low-tax "investment zones" where planning rules will be relaxed and business taxes reduced to encourage investment.
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Mr Kwarteng said the government was in early discussions with regions across England to establish the new zones, as well as the devolved administrations in Scotland, Wales and Northern Ireland.
He also confirmed the much-expected and controversial removal of a cap on bankers' bonuses.
The cap, introduced by European Union legislation in the wake of the 2008 financial crisis, limits annual pay-outs to twice a banker’s salary.
"We need global banks to create jobs here, invest here, and pay taxes here in London, not in Paris, not in Frankfurt, and not in New York," Mr Kwarteng said.
"All the bonus cap did was to push up the basic salaries of bankers, or drive activity outside Europe.
“It never capped total remuneration, so let’s not sit here and pretend otherwise. So we’re going to get rid of it."