Last week the Chancellor announced a ‘mini-budget’ focused on growing the economy. I list the main measures below, but also wanted to describe the wider context of the new measures.
The immediate reaction to the mini-budget was some significant turbulence in the currency markets, and an increase in bond yields reflecting the higher cost of government debt as the Chancellor increases our borrowing. This turbulence - which I trust will subside as the markets correct their usual over-correction - reflects the underlying challenges facing our economy, which the tax package is intended, among other measures, to address.
The increase in commodity and energy prices that we are seeing has been been driven by surging global demand after the pandemic and, particularly in the case of energy prices, by the war in Ukraine. These crises have created additional problems for the UK economy which (in addition to our strengths, including some highly successful sectors and relatively low national debt) had serious structural weaknesses, notably low capital investment and low overall productivity, leading to sluggish growth and serious regional imbalances.
The tax measures, and other supply side reforms to be announced in due course, are designed to address these underlying challenges. But the more immediate context for the mini-budget is of course the cost of living crisis. And here it is important to remember the support that has already been announced to help households with their bills.
The Government has taken significant steps to help the lowest-income households: reducing the Universal Credit taper rate; increasing the National Living Wage; freezing fuel duty; increasing the winter fuel payment by £300; a £650 payment to those on the lowest incomes, and launching a £500 million Household Support Fund.
Since Ofgem’s confirmation of the first price cap rise for energy, the Government has put forward an ambitious support package to help both lower and middle-income earners with the immediate adjustment. This includes a £400 grant for energy bills for all. Further, a non-repayable £150 cash rebate is being provided for homes in Council Tax bands A-D, equivalent to 80 per cent of all households and £144 million of discretionary funding for local authorities to support those not eligible for the council tax rebate. This means that hard working families will receive £550 with lower income families receiving even more help.
Earlier this month the Government also announced an Energy Price Guarantee (EPG) which will give people certainty with their bills. The EPG, which includes the temporary suspension of green levies, means that a typical household will pay no more than £2,500 per year for each of the next two years. This will save the typical household £1,000 a year and comes in addition to the £400 Energy Bill Support Scheme.
The Government’s Energy Company Obligation and the expanded Warm Home Discount schemes will also provide at least £4.7 billion of extra support to low-income and vulnerable households between 2022 and 2026.
This is the context for the Chancellor’s mini-budget, which involved a very significant cut in taxation across the economy. The intention is to reduce inflation, boost business, and help households across the country:
- The planned rise in corporation tax has been cancelled and will keep it the lowest in the G20. This will help to make business cheaper, preserve and create jobs and lead to greater investment in the UK.
- The basic rate of income tax will come into force a year earlier than previously suggested meaning 31 million people will save an average of nearly £200 a year in tax. Stamp duty cuts will see more than 200,000 homebuyers from paying tax altogether. This will help to keep the housing market moving – a market that a huge amount of UK companies rely on. The standard buyer in England will save £2,500, meaning a typical family moving into a semi-detached property will save £2,500 on stamp duty alongside £1,150 on energy bills.
- The rise in National Insurance has been reversed. This will not only increase the wages of 28 million people by an average of £330 per year but also save businesses around £10,000 per year. This will help to strengthen businesses and help to boost employment.
- Investment zones will be created to make business simpler and easier. Targeted and time limited tax cuts, alongside liberalised planning rules will help to release more land for housebuilding and commercial development. These will be hubs for growth but does not mean that the Government is reneging on its commitment to nature as has been suggested by various environmental organisations.
- Specific sector support for pubs and hospitality has been announced. Alcohol duty has been frozen for another year while a consultation on modernising alcohol takes place.
- Reforming IR35 rules to simplify off-payroll working rules.
- Boosting tourist revenue by creating a digital VAT-free shopping scheme.
- Incentivising business investment by making the temporary £1 million Annual Investment Allowance permanent.
The full Growth Plan documents can be found here.
