Almost half of the personal tax cuts in the mini-budget will go to the richest 5% of the population, according to analysis by leading economic thinktanks.
Highest earners will gain the most from Kwasi Kwarteng’s giveaways after the chancellor cut the top rate of tax for people paid more than £150,000 from 45p to 40p – although big earners in Scotland will not benefit from this.
The better-off will also benefit from cuts to national insurance payments and an across-the-board reduction in the basic rate of income tax, which will be cut from 20% to 19%, due to take effect next year.
The Institute for Fiscal Studies (IFS) said the net effect on someone earning £1m would be a £40,000-a-year gain, reversing the more progressive tax changes planned by the former chancellor Rishi Sunak.
“Taken together, today’s measures undo much of the tax rises introduced by Johnson and Sunak, and undo all of them for the highest-income households,” it said.
“The losses for middle- and higher-income households from previously introduced policies will be roughly halved by today’s measures.”
The richest tenth of households, who were set to lose about 3% of their annual income, or £3,500 a year, in 2025-26 under Boris Johnson and Sunak’s plans, would now gain around £700 a year – or 1% – on average, it said.
The IFS director, Paul Johnson, said he was dismayed that the impact of the measures, including cuts to stamp duty on home purchases and a reversal of planned increases in corporation tax, had escaped analysis by the Treasury’s independent forecaster, the Office for Budget Responsibility (OBR).
He said: “Kwarteng has shown himself willing to gamble with fiscal sustainability in order to push through these huge tax cuts.
“He is willing to shrug off the risks of inflation, and to invite significantly higher interest rates. And he has avoided scrutiny by presenting a budget in all but name without accompanying forecasts from the OBR.”
The Resolution Foundation said the chancellor’s £45bn package of tax cuts – the largest since Anthony Barber’s 1972 budget, would boost growth in the short-term but force the Bank of England to raise interest rates and see an additional £411bn of borrowing over five years.
It said the chancellor’s generosity was risky when he had already sanctioned about £150bn of support to cap household and business energy bills.
Debt was on course to rise in every year, it said, reflecting the largest permanent loosening of fiscal policy on record.
Torsten Bell, the foundation’s chief executive, said that “every scrap of Treasury orthodoxy has been torn up” in a bid to generate growth through tax cuts.
“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.”
Mel Stride, the Tory chair of the Treasury select committee, who is expected to grill Kwarteng about his spending plans within the next few months, said the “radical” measures should have been checked by the OBR.
He said what jittery financial markets needed to know “is not just the cost of the various measures but how they fit together with the future trajectory of the economy” and the government’s ability to pay its debts.
Jagjit Chadha, the director of the National Institute of Economic and Social Research, said Britain was “in times that are causing us great concern”.
“The point of having independent institutions such as the OBR and the Bank of England was to move away from the cycles of boom and bust that had plagued the economy in the past.”
Paul Johnson said he agreed with previous analysis by the OBR that tax cuts rarely paid for themselves, contradicting the chancellor’s view that tax cuts stimulate growth and generate extra tax receipts.
The IFS report said the cancellation of a planned rise in corporation tax from 19% to 25% was one of the biggest measures, costing £15.4bn.
“It will help to increase investment in the UK and therefore boost UK GDP, meaning that the long-run cost of the policy will almost certainly be lower than this. However, the evidence is clear. The cut will not pay for itself,” it said.