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Economy will feel a £100bn boost from tax cuts

Bank of England UK Economy Growth GDP Budget
Bank of England UK Economy Growth GDP Budget

The economy is set for a boost of almost £100bn over the next decade as tax cuts stimulate growth, according to analysis by the Taxpayers’ Alliance and Europe Economics.

Kwasi Kwarteng’s moves to reverse the national insurance increase and cancel the corporation tax jump planned by his predecessor Rishi Sunak will stop those taxes harming growth, while cutting income tax will add an extra boost, the economists said.

That equates to the economy being around 3pc larger, or £99bn, than it would otherwise have been, said Andrew Lilico at Europe Economics.

“GDP growth as a consequence of the package of measures is 0.3pc on average faster after 10 years than it would have been otherwise. Most of that, about 60pc, is not taking growth off by having a huge corporation tax rise,” he said.

Investment will be £29bn higher per year, a rise of 10pc on what would have been expected if corporation tax had risen from 19pc to 25pc as had been planned under Mr Sunak and Boris Johnson.

Getting rid of the national insurance raid, which was due to become the health and social care levy next year, will boost GDP by £25bn, while the cut in the basic rate of income tax from 20pc to 19pc will add another £8bn to the economy.

Meanwhile the average worker’s earnings will be £1,148 higher per year, or £22 per week, thanks to tax cuts boosting the economy.

As a result of faster growth, the hit to taxes is much smaller than one might assume when looking only at the tax cuts, he added.

“If you cut taxes, maybe you do not get as much revenue out of that tax, but if it leads to the economy growing faster, you may get higher tax returns from other sources, so you have this ‘recycling’ rate,” Mr Lilico said.

“The recycling rate is about 75pc, so you get three-quarters back in tax as a consequence.”

The boost to GDP, of 0.3 percentage points per year, will only contribute marginally to the Government’s stated aim of getting trend growth to 2.5pc per year, with more reforms to the economy’s supply capacity required to help support the economy for the longer-term, he said.

“It is worth trying reforming the planning system to see if you can raise longer-term growth,” said Mr Lilico.