On Friday we have the first ‘Fiscal Event’ for the new Liz Truss government.
You may recall that during leadership election process Liz Truss indicated that she would seek to use an ‘Emergency Budget to … get the economy growing’ and ‘help people struggling with bills’.
To be clear, Friday’s ‘Fiscal Event’ is very specifically not an Emergency Budget.
In order for there to be a Budget there would need to be a series of forecasts from the Office for Budget Responsibility setting out the costs and impact of the measures being introduced. Those forecasts will not be required for this Friday’s announcements.
Some will say that this is a deliberate step by the Government to announce a series of measures without saying how much they cost and how they will be funded. The counter argument is that, as there was only a very short window of opportunity in which make the announcements (Parliament goes into recess next Monday), there simply was not time to formulate the policies and then ask the OBR to provide full costings and forecasts.
Whatever the reason, and I suspect that your point of view depends largely on your political persuasion, I do feel uncomfortable that there may be measures announced, which will create considerable extra costs for the Treasury, without independent identification of the effects of which will not have been verified. Given that the previous forecasts, produced in March, have been described as ‘hopelessly out of date’ by the Institute for Fiscal Studies, one is tempted to ask if anyone is fully aware of what the overall impact will be? That said, there was always going to be some friction between acting quickly enough to appease those impacted by the cost of living increases and having full knowledge as to the impact of the measures announced.
What could we expect?
Rumours abound as to what we might see from the new Chancellor of the Exchequer, Kwasi Kwarteng, on Friday.
Liz Truss has already said that she plans to cancel the 1.25% National Insurance increase that came into effect last April. It seems certain that this will be announced, and it appears that this measure may come into force quickly, possibly with effect from November.
Also on the ‘dead cert’ list is the cancellation of the planned Corporation Tax increase. Corporation Tax for companies with profits over £50,000 was due to increase from 19% to 25% with effect from 1 April 2023.
The Energy Price Cap has already been announced with the statement that the average price for a household energy bill will not go above £2,500 for the next two years. What we will no doubt hear is how this will be achieved. I’m sure businesses will be hoping for further detail on what will be done in relation to their energy bills with only vague statements having been made so far.
There seems to be increasing thought that the 1% cut in the basic rate of tax from 20% to 19%, already scheduled to occur in 2024 will be brought forward by a year.
The previous Government had already introduced the concept of Freeports which offered lower rates of tax and reduced red tape in certain areas. It would appear that the new Chancellor may push this idea further by creating ‘Investment Zones’ with similar benefits.
Fiscal Event – Growth Plan
The rationale behind all of the above is that decreasing the tax burden increases efficiency, investment and competitiveness, and that in the medium to long term, the growth in the economy enables the debt taken out to fund that growth to be repaid. The problem, of course, is that debt is already at high levels as a result of the huge stresses placed on the economy by Covid.
Investing monies that you have in order to generate growth is certainly sound. Indeed, borrowing to fund investment is commonplace amongst business and government, provided the upsides are identified, it has been costed out and the benefits outweigh the costs. However, borrowing when already deep in debt without having properly identified the costs seems to verge on gambling. Let us hope that is not the case here.
Finally, there is increasing speculation that the Chancellor may be looking to ‘pull a rabbit out of the hat’ with an unexpected ‘headline grabbing announcement’. A cut in the rate of VAT is being mooted as a possibility for this, as is some reduction in Inheritance Tax.
The latter would undoubtedly be less costly for the Government, given the relatively insignificant contribution to the overall tax take that is represented by IHT. However, I cannot see that is an ‘easy sell’ at the current time given the demographic most impacted by IHT. That said, it is a universally unpopular tax.
A decrease in VAT, on the other hand, could certainly be targeted so as to benefit an increased proportion of the population.
