Open the throttle. Put the pedal to the metal. The £45bn of tax cuts unveiled by the UK Treasury amount to the biggest fiscal event since the 1972 Budget from the government of Ted Heath. That “dash for growth” ended badly. Once again, business is bracing for a bumpy ride.
Sterling slumped and gilt yields jumped at the prospect of a groaning government balance sheet.
The City will welcome the warm sentiments of tax-cutting new chancellor Kwasi Kwarteng. He has dispelled the indifference Boris Johnson’s government showed for the financial services sector. But City economists will be alarmed by the scale of his experiment in unconventional economics
Individual bankers have plenty to cheer. They are well represented among the top 1 per cent of earners who will gain from the axing of the 45 per cent additional tax rate. They will benefit from the lifting of the distortive bonus cap, too.
This is a sensible move, albeit poor politics. It will give banks more flexibility in how they manage their costs, enhancing London’s appeal.
Though the bank surcharge is not being cut, banks will benefit from the cancellation of the corporation tax rise, maintaining their combined rate at 27 per cent. They no longer face an extra £4.5bn tax bill in the two years to April 2025, according to House of Commons Library estimates.
Kwarteng hopes low corporation tax will boost private sector investment. The UK invested just 10 per cent of GDP in 2019, four percentage points less than the OECD average.
The impact is debatable. A recent review of past studies in the European Economic Review said the hypothesis of a zero effect of corporate taxes on growth could not be ruled out. Rishi Sunak, Kwarteng’s predecessor, reckoned it made more sense to boost allowances.
Kwarteng’s unconventional economics exacerbate business uncertainty. That will overshadow the allure low taxes have for investors. His fiscal activism adds upward pressure on interest rates. That will reduce demand in many sectors. Banks will garner fatter net interest income — but more bad loans to boot.
The ambition of the chancellor to raise the growth rate to 2.5 per cent is a worthy one. But his policies will make that harder. The cynical political calculus may be that tax cuts bolster core Conservative support even if they damage the economy.
The Lex team is interested in hearing more from readers. Please tell us what you think the mini-Budget means for financial services in the comments section below.