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Two thirds of tax cuts from mini-budget reversed Two thirds of tax cuts from mini-budget reversed
(about 2 hours later)
The government will reverse "almost all" of the tax cuts announced in last month's mini-budget in an emergency move aimed at calming investors.The government will reverse "almost all" of the tax cuts announced in last month's mini-budget in an emergency move aimed at calming investors.
New chancellor Jeremy Hunt said the strategy, which includes keeping income tax at current levels, would bring in £32bn.New chancellor Jeremy Hunt said the strategy, which includes keeping income tax at current levels, would bring in £32bn.
The move comes after economists warned the original plans would leave a £60bn black hole in the public finances.The move comes after economists warned the original plans would leave a £60bn black hole in the public finances.
Mr Hunt said his priority was to restore "economic stability".Mr Hunt said his priority was to restore "economic stability".
The government's mini-budget on 23 September sparked alarm among investors. The then chancellor Kwasi Kwarteng announced huge tax cuts on top of a plan to subsidise energy prices for two years. He did not give any detail on how the tax cuts and extra spending would be paid for. Last month Mr Hunt's predecessor, Kwasi Kwarteng announced huge subsidies to energy prices and sweeping unfunded tax cuts, prompting turmoil in the financial markets. Investors were alarmed that there was no independent assessment of the impact on the economy and no explanation of how the package would be paid for.
"At a time when markets are rightly demanding commitments to sustainable public finances, it is not right to borrow to fund this tax cut," added Mr Hunt, referring to the plan to Mr Kwarteng's plan bring down the basic rate of income tax by 1p. Mr Hunt said he would be shelving almost all of Mr Kwarteng's tax changes and would look again at the way energy bills were being subsidised across the board.
Mr Hunt noted that the instability on financial markets had a wider impact affecting "the prices of things in shops, the cost of mortgages and the values of pensions". "At a time when markets are rightly demanding commitments to sustainable public finances, it is not right to borrow to fund this tax cut," added Mr Hunt, referring to Mrs Kwarteng's plan to bring down the basic rate of income tax by 1p.
Immediately after the mini-budget, investors began demanding higher rates of interest to lend to the government as the UK was deemed a higher risk investment and borrowing costs surged to worrying levels. The pound rose and government borrowing costs fell after Mr Hunt's announcement.
The turmoil forced pension funds to sell bonds due to concerns over their solvency, and threatened to create a downward spiral in bond prices as more were offloaded which left some funds close to collapse. Black hole
The Bank of England was forced to step in to buy bonds to try and stabilise their price. The Institute for Fiscal Studies (IFS), an economics think tank, has warned that the government faced having to make "big and painful" spending cuts to put the country's finances on a sustainable path.
The turmoil also fed through to the mortgage market, where hundreds of products have been suspended due to concerns about how to price these long-term loans. It calculated the government would have to spend £60bn a year less by 2026-27, even taking into account an earlier u-turn over the top rate of income tax.
The Institute for Fiscal Studies (IFS) warned last week that that the chancellor would need to make "big and painful" spending cuts to put the country's finances on a sustainable path. Mr Hunt's new strategy will mean more money coming in, reducing the need for severe cuts to government spending on services such as the NHS, education and defence. But it still leaves a £28bn shortfall, if the government is to meet its commitment to balance the books over the next three years.
The think tank predicted that with a weaker economy and promised tax cuts, there would be a large shortfall in revenue. Governments do borrow to fund spending in difficult times, but a shortfall in the government budget, often dubbed a "black hole", can make investors nervous, if it is not clear that it is a temporary measure.
It calculated the government would have to spend £60bn a year less by 2026-27. Immediately after Mr Kwarteng's mini-budget, rates of interest for government borrowing shot up to worrying levels as the UK was deemed a higher risk to lend to. That also pushed up borrowing costs for businesses and individuals, including for mortgages.
Governments also usually avoid borrowing to cut taxes or spend more at times when inflation is high, because it can add to the upward pressure on prices.
Mr Hunt stressed that it was the government's responsibility to "do what's necessary for economic stability".
"Governments cannot eliminate volatility in markets, but they can play their part, and we will do so because instability affects the prices of things in shops, the cost of mortgages and the values of pensions," he said.
Mr Hunt said he would put the government's finances on a sounder footing by reversing many of Mr Kwarteng's announcements. He said savings of £32bn would be made by 2026-27 by:
keeping plans to raise corporation tax to 25% (18.7bn)
keeping the basic rate of income tax at 20p, rather than cutting it to 19p next year (5.9bn)
keeping a planned increase to the tax on dividends (£0.9bn)
shelving changes to IR35 rules for freelance workers (£2bn)
cancelling a plan to offer tax-free shopping to tourists (£2.1bn)
allowing alcohol duties to rise instead of being frozen (£0.6bn)
Mr Hunt also announced that support for every household's energy bills, which will cost an estimated £60bn over this winter, will remain in place until April, but after that the scheme will be reviewed, to see if cost savings can be made.
Two other measures announced by Mr Kwarteng will remain:
taking National Insurance back to the level it was earlier this year, before a levy was added to fund health and social care
a reduction in stamp duty - the tax paid when selling a property - which have already been applied
The government's stated aim is to not be spending any more than it is receiving in tax receipts by the 2026-27 tax year, in order to keep the overall burden of debt at current levels.