Mini-budget sparks market turmoil

The pound has fallen sharply and government borrowing costs have soared, after the Chancellor, Kwasi Kwarteng, announced the biggest package of tax cuts for 50 years.

Kwarteng set out the measures in a statement to the House of Commons on 23 September, which the government called a growth plan and which has become known as the mini-budget.

The tax cuts

The 45p top rate of income tax, paid on earnings over £150,000, will be abolished. The basic rate will be cut from 20p to 19p from April.

A planned rise in corporation tax to 25 per cent will be cancelled, and the recent rise in National Insurance will be reversed. Stamp duty on home purchases will be cut, and the cap on bankers' bonuses will be scrapped.

The package also includes the energy price guarantee, which limits household energy bills this winter.

The tax cuts are estimated to cost about £45 billion a year by 2026, paid for by extra borrowing.

Market reaction

The pound fell by around 3 per cent against the dollar on the day, and the interest rate on government bonds rose at the fastest rate for decades. Investors are worried about how the government will pay for the tax cuts.

The Office for Budget Responsibility was not asked to publish a forecast alongside the plans, which some economists have criticised.

A new government

The plan is the first major economic statement by Liz Truss's government. Truss became Prime Minister earlier this month, after winning the Conservative leadership contest on a promise to cut taxes and boost growth.

Kwarteng said the government wanted to break out of the cycle of stagnation and achieve growth of 2.5 per cent a year.

Reaction

Labour said the plan was a desperate gamble that would benefit the richest the most. The Institute for Fiscal Studies said the government was betting the house on growth.

Some Conservative MPs have expressed concern about the scale of borrowing and the abolition of the top rate of tax.

Inflation

The package comes at a time of high inflation, running at close to 10 per cent, driven by rising energy and food prices. The Bank of England raised interest rates to 2.25 per cent the day before the statement.

Economists warn that the tax cuts could push inflation higher, forcing the Bank to raise rates further, which would hit mortgage holders.