To my mind there were two truly significant aspects to last week’s ‘fiscal event’.
The first was the financial aspect – tax cuts and higher borrowing. The second was the statement of intent by the Liz Truss Government. I am unsure which was the more significant – but certainly by the time Kwasi Kwarteng sat down having finished his ‘not so mini-budget’ speech, it did feel as though something significant had happened.
It is not that everything that he announced was ‘news’, a good deal of it had been trailed beforehand – though the ‘rabbit out of the hat moment’ was as unexpected as anything in recent Budget speech memory. More on that later.
In a rapid-fire series of measures we had tax cuts in a number of areas:
The 1.25% cut in National Insurance (from 6 November) and the cancelling of the Health and Social Care Levy, that was to replace this from April 2023, was a clear signal of the new direction – leave as much as possible with the taxpayer and let them drive the economy.
This was echoed by the cancellation of the planned increase in the rate of Corporation Tax – currently at 19% but had been due to rise to 25% next April. Now it will remain at 19%.
There was already a promise, under the previous regime, to reduce the rate of Income Tax to 19% as of April 2024 – that will now happen a year earlier.
There are also cuts to Stamp Duty, doubling the band where no SDLT is paid to £250,000 and increasing the 0% threshold for first time buyers to £425,000 (from £300,000).
And the Annual Investment Allowance, which gives 100% relief for business’ capital expenditure which had been ‘temporarily’ increased from £200,000 to £1m will now remain at the higher level permanently.
The intention of all of these measures is to drive growth in the hope that growth will in turn provide the additional tax revenues needed to repay the borrowing.
Only time will tell if this strategy works but there are some strong headwinds against which to battle.
Borrowing is already high, largely as a result of the Covid pandemic which was a massive shock to the financial system. That borrowing will only increase in the short term, not only as a result of the measures above, but also through the measures taken to fund the energy price cost cap.
Interest rates are increasing – meaning that not only will the cost of the existing and new borrowing be much higher, but just as importantly those high interest rates are specifically designed to reduce spending, to curb high inflation. We therefore have a government trying to get the private sector to spend, and the Bank of England trying to cool the economy.
There are, as ever, those who strongly support the Budget announcements and the new direction being taken by the Government, and those who strongly oppose. Both sides have some good arguments (and some poor ones) but the reality is no-one knows for sure what the outcome will be.
To me it does feel like a gamble. Has all of this really been properly costed out? Certainly the Office for Budget Responsibility (OBR) has not yet factored them into forecasts, though they will do soon. But even when they do, much depends on the unknown – will the measures drive growth – and if they do, by how much? Even the OBR are not fortune tellers.
The truth is that no-one knows for sure what will happen, but it certainly seems to be a high-risk strategy.
And so to that ‘rabbit out the hat’ moment – the scrapping of the 45% “additional rate” of tax. This is an overt political statement. The lost revenue for the Treasury is unlikely to be hugely significant. For 2021/22, fewer than 450,000 people paid the additional 5% tax, just over 1% of taxpayers. Behavioural changes for those on the margins of the £150,000 earnings limit will mean that as a minimum, a proportion of the lost revenue will be replaced immediately – and of course if the overall economic plan is sound there could be no cost at all. In purely fiscal terms, therefore, at worst it is likely to be a bit of a ‘nothing’ but as a statement of intent it was huge because, alongside the scrapping of the cap on bankers’ bonuses, it represents the embodiment of the new government’s mantra – “we will do what is necessary, even if it is unpopular”.
I confess that, having watched for years as massive complexity (and arguably unfairness) has been pushed into our tax system by successive governments (blue, red and coalition) because any measures had to upset as few people as possible – or fulfil an ‘us and them’ narrative, I would find it massively refreshing if that was now to change and we had a government prepared to implement tax change purely for the long term fiscal outcome without the need to complicate it to appease as many people as possible.
Unfortunately I am not convinced that is likely.
Announcing a review of the chaotic IR35 rules would seem a good start were it not alongside disbanding the independent Office for Tax Simplification (OTS). I have seen the excellent work of the OTS up close – particularly in relation to recent reports into Inheritance Tax and Capital Gains Tax. To be clear, the OTS has made numerous recommendations to government that would have led to significant simplification of the tax legislation, however ministers have usually shied away from adopting these recommendations for fear of doing something unpopular – most changes produce losers as well as winners.
If getting rid of the 45% tax rate was truly a sign of a government willing to take unpopular steps to reshape the tax system, snapping the OTS is an odd way to follow it up.
