Major U-Turn for Mini-Budget

Jeremy Hunt, the new Chancellor, has unwound many of the measures announced in the notorious 23 September mini-Budget

---

On Friday, Jeremy Hunt was named the UK’s 4th Chancellor in as many months, following the sacking of Kwasi Kwarteng.

This morning, the Treasury issued a press release nobody was expecting: Hunt, was effectively going to reveal most of the elements of the Medium-Term Fiscal Plan later in the day, two weeks earlier than planned.

Such a rushed release pointed to concern that the sacking of Kwasi Kwarteng and dropping of corporation tax cuts would not be enough to appease the markets when they opened this morning.

The Chancellor’s announcements reversed much of what was left of Kwasi Kwarteng’s ‘fiscal event’. The headlines of his statement were:

• The basic rate of income tax will remain at 20%. This was due to drop to 19% in April 2023, one year earlier than previously planned. The drop has been scrapped entirely until the economic conditions allow for any cuts.

• A review of the energy support scheme will commence, but the cap which was previously promised for 24 months will only be in place until April 2023. With the cap increasing on 1 October 2022 from the previous cap of around £1,600 a year for an average household, it is likely to bring increased uncertainty for those impacted. The Chancellor stated that “The objective of the review is to design a new approach that will cost the taxpayer significantly less than planned whilst ensuring enough support for those in need.” This implies a more targeted approach in the future of support in this area.

• Dividend tax will not be reducing back to the pre-April 2022 rates in April 2023, remaining at 8.75%, 33.75% and 39.35%. This again will be until it is deemed possible to review and reduce due to economic conditions.

• The IR35 rules remain, just as they did in the mini budget. However, the u-turn in this area means that again the responsibility for compliance with them will fall to the businesses and not revert back to the individuals (the worker). Significant work had been undertaken at the expense of industry to implement these changes and so not changing the focus of these now will mean money hasn’t been wasted.

• The freezing of alcohol duty from February 2023 for a year has also been scrapped which is worth approximately £600 million a year. However, other reforms in this area will remain as will the review in due course.

• The introduction of a new VAT-free shopping scheme for non-UK visitors to Great Britain will not be proceeding saving around £2 billion a year.

• The Health and Social Care levy reduction that has already progressed through parliament and so the reduction in National Insurance by 1.25% will still come into being in November, with the scrapping of the Health and Social Care Levy in April 2023.

• A confirmation of Liz Truss’s announcement of the reintroduction of the increase in corporation tax from 19% to 25% for those companies with profits in excess of £250,000 and the slide scale for those with profits over £50,000.

Add today’s measures to the reversals on corporation tax and additional rate tax and £32bn of Kwasi Kwarteng’s £45bn extra borrowing in 2026/27 has now been removed.

However, that is not the full story, given that the Treasury’s September numbers took no account of what has happened to the UK economy since the Office for Budget Responsibility (OBR) last published an Economic and Fiscal Outlook (EFO) in March.

The recent number crunching by the Institute for Fiscal Studies put the black hole in 2026/27 at £62bn. With today’s measures that comes down to about £32bn. That may be optimistic - weekend rumours pointed to the OBR’s starting figure being £10bn higher than that of the IFS projection.

Comment

The Chancellor has acted swiftly to calm markets, but how long the stability lasts remains to be seen.

Today’s changes are unlikely to have any immediate impact to take home pay over the next few months because changes were not already in force.

There is however a question mark over whether the Truss Government can get all its measures through – never mind the bigger question which is when will the sword of Damocles eventually fall on Truss, because one thing is for certain, she will not be the PM that leads this Government into the next General Election.