Kwasi Kwarteng will deliver the biggest package of tax cuts since Margaret Thatcher was in Number 10 Downing Street on Friday, the Institute for Fiscal Studies has said, as he cancels Rishi Sunak’s plans to ramp up corporation tax and reverses April’s rise in National Insurance contributions.
The Chancellor confirmed on Thursday that the 1.25 percentage point increase in National Insurance announced by Mr Sunak would be reversed from November 6. Mr Kwarteng is expected to follow with more tax cuts in his mini-budget statement on Friday.
Paul Johnson, the IFS’s director, said the Chancellor was ripping up his predecessor’s tax increases with an intervention on a scale not seen in 34 years.
“This will actually, we think, be the biggest tax-cutting fiscal event since Nigel Lawson’s budget of 1988,” he said.
Combined with extra spending, including more than £100bn to hold down energy bills, the cuts put the Government on track for years of heavy borrowing.
However, despite the deficit binge, households will still feel worse off this year due to rampaging inflation, analysts warned.
On top of this, the economy has slowed to a crawl and may already be in recession, undermining tax revenues and so further tipping the public finances into the red.
“The economy is set to grow a lot more slowly than was expected [at the time of the March spring statement] so even without the tax cuts, it looks like the long-term deficit will be perhaps £40bn higher than expected back then, after all of the energy support package has come to an end,” Mr Johnson said.
“Add another £30bn of tax cuts and we are expecting to end up with a deficit in three years’ time at around the £100bn mark.”
It puts the Government on track to borrow around £100bn or more each year for the foreseeable future, the IFS warned, starting with £231bn this year – up from the £99bn the Office for Budget Responsibility predicted back in March – and £162bn next year, more than three-times March’s forecast of £50bn.
For the following three years, the annual deficit is set to come in at around £100bn, compared to around £35bn per year on the OBR’s prior predictions.
“If that is where we end up, not only will that break the fiscal rules legislated just earlier this year, it will put debt on an unsustainable path,” said Mr Johnson.
However, despite the tax cuts and very heavy spending to hold down energy bills, the average person will still feel worse off this year than last year thanks to galloping inflation eroding living standards.
The median worker on £29,000 will be just over £500 worse off, equating to a 2.8pc fall in their real earnings, the IFS estimates.
Someone on £44,000 will be down more than £1,000, or 3.9pc.
Only a full-time worker on the minimum wage, earning £16,200, will find themselves keeping up with prices, eking out a 0.1pc rise in take-home pay this year.
Boris Johnson’s government effectively overall implemented “a large tax rise”, said Xiaowei Xu at the IFS.
Some of this will be softened by Mr Kwarteng’s expected tax cuts, but overall Britons face net tax rises over the past 12 months, amounting to a roughly £500 hit for the average household, rising to close to £2,000 for those in the top 10pc by income.