The “mini” budget which is going to have maximum impact

The UK government has announced the largest tax cuts in 50 years as part of their mini budget to deal with the cost of living crisis and boost the wavering British economy. 

The UK economy is plagued by high inflation (9.9% in August 22) and weak aggregate demand. The  main components of the policy are outlined below, and certainly at first glance appear to be very business friendly and driven by a desire to give earnings back to both workers and investors. 

Income Tax: Basic rate cut from 20% to 19%, 45% rate for top earners scrapped

National Insurance: Recent 1.25% increase to be reversed

Stamp Duty (Levy on property purchase): No duty on first £250,000

Banker’s Bonus: Cap removed

Corporation Tax: Planned increase of 19% to 25% scrapped

It is easy to think that cutting tax must be a good thing, but in reality that is not always the case! Governments don’t have an unlimited supply of money, and with tax being their main source of income, a tax cut actually leaves them with a big budgetary hole to fill. A hole which needs to be filled by borrowing, and more borrowing means more debt. 

With inflation already rampant, expansionary fiscal policy (decreasing taxes) will also stimulate the economy. Although this is what the government wants to happen there is a real risk of overheating and more spending leading to even more inflation. This will only make the cost of living crisis worse for the millions of households already struggling to pay their bills. 

Tax cuts, especially those which benefit businesses and those on high incomes, can also fuel economic inequality. More disposable income for businesses, bankers, and high income workers is not going to trickle down into the pockets of those on the lowest incomes. Yes, there might be some more investment and jobs created in the long-run, but this will take time and the initial impact of higher inflation, and with it higher interest rates will have a much more severe impact on those with low incomes and burdened with debt repayments they can already barely afford. 

If the UK government can prove that this policy is not a disaster, then hats off to them – but most of the world, including the IMF and their own central bank, are not expecting anything besides economic turmoil.