The Growth Plan 2022 – Chancellor announces largest tax cuts in 50 years, driving a £411 billion borrowing surge that will break the fiscal rules

Almost half of the personal tax cuts confirmed today will go to richest 5 per cent of population

The Chancellor’s £45 billion package of tax cuts announced today, the largest in a single fiscal event since Anthony Barber’s ill-fated 1972 Budget, will boost growth in the short-term but raise interest rates and see an additional £411 billion of borrowing over five years, the Resolution Foundation said in response to today’s fiscal statement.

The Chancellor’s decision to announce such large tax cuts – targeted at the very richest in society – comes in the context of an already large, and largely unavoidable, fiscal loosening given the weakening economic outlook and the need to subsidise the energy bills of families and firms.

While the Chancellor has unwisely not allowed the Office for Budget Responsibility to update its forecasts, Resolution Foundation analysis finds that the deterioration of the economic outlook since March, and additional packages of energy support, are estimated to have increased borrowing by £265 billion over the next five years. Tax cuts of £146 billion raise that to £411 billion.

While extra borrowing is greatest this year (£130 billion) given the scale of energy bill support, the permanence of the tax cuts combines with higher interest rates and weaker growth to mean that the £30 billion of headroom the previous Chancellor maintained against his fiscal rule of having debt falling as a share of GDP has been blown through twice over by 2026-27.

Debt is on course to rise in every year reflecting the largest permanent loosening of fiscal policy on record (the deficit will increase by 2.3 percentage points of GDP, or £67 billion, in 2026-27 compared to expectations in March). The Chancellor today set out that debt falling remains his key metric for fiscal sustainability. Achieving that during the middle of this decade would require spending cuts of £35 billion in 2026-27, assuming tax rises have been ruled out.

The tax cuts confirmed today largely reverse those introduced by Rishi Sunak in recent years, but with a particular focus on higher income households driven by the reversal of the rise in National Insurance and scrapping of the 45p rate of income tax. Someone earning £200,000 will gain £5,220 a year, rising to £55,220 for someone earning £1 million. Someone earning £20,000 will gain just £157.

Almost two-thirds (65 per cent) of the gains from personal tax cuts announced today go to the richest fifth of households, who will be better-off on average by £3,090 next year. Almost half (45 per cent) will go to the richest 5 per cent alone, who will be £8,560 better off. In contrast, just 12 per cent of the gains will go to the poorest half of households, who will be £230 better off on average next year.

The Stamp Duty cut will also make a significant difference to house purchases in London and the South East. It will reduce the tax bill on the sale of the average first-time buyer home in London by £6,300, compared to no gain for the average first-time buyer in the North East.

Despite these tax cuts, tax as a share of the economy is estimated to remain at its highest sustained level since the 1940s, reflecting the impact of remaining tax rises, a smaller economy and higher inflation.

The Foundation says that significant energy support in particular will boost GDP in the short-run this winter. However, the large increase in borrowing will also mean higher interest rates, leaving the longer run level of GDP largely unaffected. 

The level of growth, or depth of any recession, in the years ahead will be driven far more by the path of energy prices than the level of taxation – with countries opting for both higher (Germany) and lower (US) tax levels outgrowing the UK economy over the past 15 years.

Torsten Bell, Chief Executive at the Resolution Foundation, said:

“This may not have been a Budget, but the Chancellor has certainly blown the budget with the biggest package of tax cuts announced since the ill-fated Barber Budget of 1972. His decision to combine the largely unavoidable higher deficit caused by rising energy prices and interest rates with permanent tax cuts will drive up borrowing by over £400 billion in the coming years. No Chancellor has ever chosen to permanently increase borrowing by so much.

“Without significant cuts to public spending, debt will be on course to rise in each and every year. This is not what sustainable public finances look like. Every scrap of Treasury orthodoxy has been torn up.

“While the Energy Price Guarantee will do an excellent job of softening the living standards squeeze this winter for rich and poor households alike, today’s tax cuts will do little to boost the incomes of those on low and middle incomes. Someone on an income of £1 million will receive a tax cut worth £55,220 next year.

“This borrowing surge will mean higher GDP this winter, but it will also mean higher interest rates as the Bank of England aims to suck out the boost to demand the Chancellor has provided. Even those who believe lower taxes will make a major difference to growth should be cautious about putting all their eggs in that basket. After all, the tax take will remain at levels not sustained since the 1940s – even on these plans.”