Kwarteng bets on big policy interventions to deliver ‘small-state, low-tax’ pledge.
Kwasi Kwarteng’s “mini” Growth Plan budget set out the government’s economic stall last week, with a central mission to deliver a target growth rate of 2.5% for the economy.
Key to the government’s plan is billions of pounds of increased spending and tax cuts, in the belief that a smaller state will deliver more sustainable growth and lead to “higher wages, greater opportunities and more sustainable funding for public services”.
Despite being touted as a “mini-budget”, the fiscal interventions Kwarteng revealed were anything but, constituting one of the boldest Tory budgets in decades.
The announcements are especially significant for the built environment, as it brings in a fresh cut to stamp duty, a new planning and infrastructure bill, and plans to create new investment zones.
Kwarteng’s move is an impressive display of fiscal posturing, which he says will deliver growth to the economy and significantly reduce inflation. However, the markets didn’t share his positive outlook.
Startled by the size of borrowing and the most significant tax-cutting announcements in 50 years, the pound fell to an all-time low against the dollar.
In an interview with BBC’s Laura Kuenssberg on Sunday, Kwarteng commented on the market’s reaction to say the government’s strategy was one which is focused on longer-term growth, rather than short-term market volatility.
With a weakened pound driving up the cost of imports, analysts predict the Bank of England will once again raise interest rates to address the inflationary pressures the “mini” budget brings.
Despite the weaker pound and a loss of confidence in the market, the reaction across the built environment has been more optimistic in tone.
The three key announcements for the sector covered:
Stamp duty changes
- Effective immediately, there will be no stamp duty paid on the first £250,000 of a property
- The threshold for first-time buyers has risen from £300,000 to £425,000
- The government expects an additional 200,000 people will be exempt from paying stamp duty altogether due to the changes
- Sales will likely increase, but with interest rates soaring it’s unlikely we’ll see a similar uplift in home sales seen during Sunak’s ‘Covid’ stamp duty holiday
- Strong possibility that increasing demand without proportionately increasing supply will lead to higher, not lower house prices, entrenching affordability issues for first-time buyers
A promise to reform the planning system, with a focus on infrastructure
- In a bid to ‘Get the Housing Market Moving’, Kwarteng revealed the government’s promise to simplify planning rules, which he says will make it easier to build homes and commercial developments
- With a further announcement due later in the autumn, it aims to speed up development by cutting back on red tape, removing EU regulations and streamlining environmental assessments
- Aside from housing, it revealed plans to accelerate projects focused on roads, rail and energy infrastructure. There are 138 large infrastructure projects on the government’s list, which is detailed on page 35 of the Growth Plan
- For public-sector land, it stated: “the government will promote the disposal of surplus public sector land by allowing departments greater flexibility to reinvest the proceeds of land sales over multiple years”
- Kwarteng plans to set up investment zones across 38 local areas in England, which entice businesses through reduced business rates and stamp duty, with no national insurance paid by a company on the first £50k earned by a new hire
- It will lower taxes for businesses, with developers benefitting from a more streamlined planning process
- However, critics of the controversial zones say it offers limited benefit to surrounding communities, with Labour’s Rachel Reeves saying the plans would result in “moving growth around the country, not creating growth”
The initial reaction to the announcement has been broadly welcomed by businesses across the UK. However, tax cuts for businesses, those earning over £150k, and lifting the cap on bankers’ bonuses during a cost-of-living crisis won’t be easy for the public to digest.
The Chancellor’s throw of the dice is certainly bold, but we’ll have to wait and see whether it can bring down inflation, deliver growth and boost wages in the months to come.