Not Shocked Therapy – a not-so-mini budget

mini budget

Kwasi Kwarteng has announced a sweeping package of measures in his mini-budget. Dubbed the “biggest package in generations” of tax cuts, announcements include a swathe of tax cuts, the highly-anticipated freeze on energy bills and cuts to help first time homeowners. 

Sold as a “growth plan” for the UK economy, the mini-budget comes as UK households struggle to keep up with rising inflation and rocketing energy bills. The chancellor claims the government won’t let people face soaring energy bills caused by Vladimir Putin’s war in Ukraine, telling households “help is coming” with the rising cost of living. 

Here are the main points:

Income tax

  • Cut in the basic rate of income tax from 20% to 19% will be introduced from April 2023
  • Government estimates income tax cut will save 31 million people £170 next year
  • People in England, Wales and Northern Ireland are paying 20% on annual earnings between £12,571 to £50,270
  • 45% higher rate of income tax scrapped for top earners
  • One single higher rate of income tax of 40% will be introduced from April 2023

National Insurance

  • The recent 1.25% rise in National Insurance (NI) will be reversed from 6 November
  • Workers and employers have paid an extra 1.25p in the pound in NI payments since April
  • New Health and Social Care Levy to raise billions for the NHS will not be introduced

Corporation tax

  • The planned rise in corporation tax which was due to increase from 19% to 25% in April 2023 has been reversed

Benefits

  • Universal Credit rules tightened for part-time workers by reducing benefits if people don’t meet job search commitments
  • Government asks around 120,000 more people on Universal Credit to take active steps to seek more work, or face having their benefits reduced
  • Extra time with work coaches given to help jobseekers over 50 return to the job market

Work and investment

  • Government simplifies IR35 rules to reduce unnecessary complexity and cost of off-payroll working
  • Annual investment allowance remains at £1m indefinitely
  • Regulations reformed so pensions funds can increase UK investments
  • New and start-up companies can raise up to £250,000 under Seed Enterprise Investment Scheme (SEIS) giving tax relief to investors
  • The Company Share Option Plan (CSOP) that offers employees share options up to £30,000 has doubled to £60,000

Stamp duty

  • Cut to stamp duty to help people afford to buy a property in England and Northern Ireland
  • From today, no stamp duty on first £250,000 and for first time buyers that increases to £425,000 
  • Chancellor claims 200,000 more people will be taken out of paying stamp duty altogether

Energy

  • Freeze on energy bills, which the government claims will reduce inflation by 5 percentage points
  • Energy bill package expected to cost £60bn for the six months from October

Bankers’ bonuses

  • Rules limiting bankers’ bonuses to 200 per cent of annual salary has been axed
  • Package of regulatory reforms to be set out later in the autumn

Shopping

  • VAT-free shopping reintroduced for overseas visitors
  • Planned duty increases for beer, cider, wine and spirits has been scrapped

Infrastructure and investment zones

  • The government is making plans to set up investment zones with 38 local areas in England
  • Tax cuts and liberalised planning rules to be offered to release more land for housing and commercial development
  • Investment zones offered measures including no business rates and stamp duty waived
  • New legislation to cut planning rules, get rid of EU regulations and environmental assessments in a bid to stimulate infrastructure building

Final Thought on not-so-mini budget

Unlike a normal budget, the Office for Budgetary Responsibility (OBR), set up by David Cameron’s Government to curb the dangerous spending of future Governments has not been able to vet these proposals. Due to the speed at which these reforms were put together and the rules of the OBR, Liz Truss and Kwasi Kwarteng have managed to sidestep this oversight.

It is unlikely to stop a tide of judgements on these proposals. The markets have already made their displeasure clear as the value of the pound takes a dive and yields on gilts jump. Think Tanks, the opposition and even voters will all have to make up their mind as to whether they support this enormous gamble.

What is clear that in search of growth Liz Truss is willing to drastically increase inequality. To those who have followed Liz Truss’s career and her leadership race these changes, though massive, will not come as a shock. They represent a faith in the free-market ideology of Margaret Thatcher to deliver growth. Expect to hear throwbacks to Laffer curves and trickle down economics in the coming days.

In the 1980s Margaret Thatcher inherited a Britain where industries were run with little reference to profit, high taxes drove away high earners and regulation had built up in the financial system. Privatisation, deregulation and tax cuts helped unleash growth but also caused many of the economic woes Governments of all stripes have been trying to fix since. Unemployment, deindustrialisation and inequality were the price the UK paid for growth.

In 2022, Britain’s debt is high, industries already face little regulation and taxes are competitive. A modern Thatcher would start with an analysis of the current state of the economy before prescribing “shock therapy” to achieve growth. It may be that this time the UK will see all the price and none of the gain of 1980s style policies.

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