Chancellor’s U-turn on the 45% income tax rate
Although far from being the first Chancellor to perform a volte-face on a tax announcement (remember George Osborne having to reverse on the “pasty tax” in 2012?), it is hard to recall such a screeching about turn as the one performed by Kwasi Kwarteng on Monday, 3 October, when the abolition of the 45% additional rate of income tax, proclaimed so loudly in the Commons only ten days earlier, was cancelled abruptly, barely half an hour before he was due to be interrogated on Radio 4’s Today programme by the BBC’s Nick Robinson.
The additional rate of 45% will now continue to apply to anyone with annual income to the extent that this exceeds £150,000, although those in that category will still benefit from the withdrawal of the National Insurance increase from 6 November 2022 and the reduction of the basic rate of Income Tax from 20% to 19% from 6 April 2023.
It seems clear that the failure to present an independent economic and fiscal forecast from the Office for Budget Responsibility on 23 September, at the same time as the “Growth Plan” (the official title for the mini-Budget), was a major error on the part of the Chancellor.
There will now be considerable speculation as to what the OBR’s forecast will contain when this is published to coincide with the Chancellor’s Medium-Term Fiscal Plan, both having now been brought forward to 31 October from the original date of 23 November, not least because the cost saving of not going ahead with the abolition of the 45% rate is reckoned to be only a fraction of the total package of tax cuts he has proposed.
According to the Director of the Institute for Fiscal Studies: “[The Chancellor’s] £45 billion package of tax cuts has now become a £43 billion package – a rounding error in the context of public finances…Unless he also U-turns on some of his other, much larger tax announcements, he will have no option but to consider cuts to public spending: to social security, investment projects, or public services.”
At the Conservative Party Conference this week, the Prime Minister came on stage to the strains of M People’s 1990s hit Moving on Up. For the Chancellor, it may be that over the next few weeks something from the 1970s turns out to be more appropriate. How about Bachman-Turner Overdrive’s You Ain’t Seen Nothing Yet?