With a new King at the Palace and a new Prime Minister at Number 10, it was no surprise that the new Chancellor at Number 11 used his first statement to the House of Commons to signal a “new era” for fiscal policy.
It turned out to be a striking change of direction, as the Chancellor opened his speech, saying: “We will be bold and unashamed in pursuing growth, even where that means taking difficult decisions”.
Gone was the Rishi Sunak era’s post-Covid emphasis on fiscal responsibility. Instead, in what was formally referred to as The Growth Plan but had informally been dubbed a mini Budget, Kwasi Kwarteng set out an approach prioritising tax cuts for individuals and businesses over immediate repairs to the public finances.
The Chancellor’s assumption is that cutting tax rates will boost economic growth and so increase the overall tax take.
This was Mr Kwarteng’s first real test as Chancellor: 18 days into the job, with inflation sitting at 9.9% and energy prices spiking, interest rates rising, a weakened pound, plus the UK’s economic recovery from Covid by no means complete.
Only a day earlier, the Bank of England’s Monetary Policy Committee had raised interest rates sharply by half a percentage point to 2.25% – the highest level in eight years – in a bid to stave off spiking inflation.
Despite being a Fiscal Statement rather than a Budget – and a departure from the familiar Budget scheduling of Wednesday after Prime Minister’s Questions – the policies trailed in the days and weeks running up to the speech suggested that it might prove to be more significant an event than many fully-fledged Budgets.
This summary covers the announcements on:
- Income tax
- National Insurance Contributions (NICs) and the Health & Social Care Levy
- Off-payroll working rules (IR35)
- Corporation tax (CT)
- Stamp duty land tax (SDLT)
- Annual Investment Allowance (AIA) and Seed Enterprise Investment Scheme (SEIS)
- Investment Zones
- Energy bills
Income tax
In a speech full of significant announcements, perhaps the most notable related to income tax.
The Chancellor announced that the additional rate of income tax, which is currently 45% on income over £150,000 will be scrapped entirely from April 2023.
He then moved to bring forward the cut in the basic rate of income tax to 19%,which had been planned for April 2024, to April 2023.
National Insurance Contributions/ Health and Social Care Levy
Another landmark policy of the Johnson Government was the 1.25% Health & Social Care Levy paid by employees and employers to help meet the cost of social care.
The current tax year is a transitional year in which the increase has been applied to NICs and it was to have become a standalone tax from April 2023.
Now, the Chancellor has announced that the charge will be scrapped and will no longer apply from 6 November 2022. The move also scraps the planned increase in dividend tax which was due in April 2023.
He said the reason for the move was to support smaller businesses, help households and boost economic growth.
IR35 off-payroll working rules
In an unexpected move, the Chancellor announced that the reforms to the IR35 off-payroll working rules in 2017 and 2021 for individual contractors operating via personal service companies (PSCs) in the public and private sectors respectively would be scrapped.
The change means that it will no longer be the responsibility of the organisation engaging contractors’ services to determine whether a contractor should pay tax on the same basis as an employee. Instead, that responsibility will revert to the contractor, as was the case previously.
Cancellation of planned corporation tax increase
The last Chancellor but one, Rishi Sunak, had announced a plan to increase the rate of CT from 19% to 25% from April 2023 for companies with profits of more than £250,000. Those with profits of between £50,000 and £250,000 would have benefitted from tapered relief, while there would have been no increase for those with profits of £50,000 or less.
In a striking change from the previous Government’s policy, and consistent with the Prime Minister’s leadership campaign pledge, Mr Kwarteng announced that the planned increase will no longer go ahead and CT rates will remain at 19%.
Mr Kwarteng said that the rationale for the change is to encourage the investment needed to help the economy grow.
Stamp duty land tax
In what might prove to become a tug of war between the Treasury and the Bank of England, just a day after many homeowners learned of a painful interest rate rise, the Chancellor offered substantial consolation in the form of a cut to SDLT.
Indeed, just yesterday, the Governor of the Bank of England wrote to the Chancellor to warn him that tax cuts might mean even sharper interest rate rises.
Undeterred, the Chancellor pressed ahead with a move to double the SDLT threshold from £125,000 to £250,000 with immediate effect. For first-time buyers, the threshold will rise to £425,000 on properties of up to £625,000. The measure will apply permanently.
Annual Investment Allowance and Seed Enterprise Investment Scheme
In another surprise move, the Chancellor announced that the AIA would not fall back to £200,000 in 2023 but would instead remain at its current £1 million level permanently.
Meanwhile, he said there would be a two-thirds increase in the amount companies can raise through SEIS to £250,000 from April 2023. At the same time, the Annual Investor Limit will rise to £200,000.
Investment Zones
The Chancellor also announced the launch of up to 40 Investment Zones. In England, he said the Government is considering time-limited tax incentives for 10 years, including:
- 100% business rates relief,
- 100% first-year allowances for qualifying expenditure of plant and machinery
- An enhanced Structures and Buildings Allowance
Mr Kwarteng said that the Government is also considering:
- Zero-rate Employer’s NICs on salaries of new employees in Investment Zones up to £50,270 a year
- Full SDLT relief on land and building bought for commercial or new residential development
The Chancellor said that he will work with the Devolved Administrations to offer similar incentives in Investment Zones across the UK.
Energy bills
Following on from the Prime Minister’s announcement on 8 September of the Energy Price Guarantee and the Secretary of State for Business, Energy, Innovation and Skills in relation to business energy costs, the Chancellor reiterated the support being offered.
He said that the Energy Price Guarantee, alongside the £400 credit already announced, will cut bills by around £1,400 for a typical household in comparison to the levels they were expected to reach without Government action.
Meanwhile, he confirmed that businesses, charities and public sector organisations will benefit from equivalent relief if they had not locked into a fixed-rate tariff by April 2022. That measure will last for six months from 1 October 2022.
The Chancellor said that the Government’s intervention will reduce inflation by around five percentage points.
Not such a mini Budget after all
The speech was a dramatic statement of the fiscal philosophy being pursued by the new occupants of Number 10 and Number 11 Downing Street. They hope that by reining in energy bills and cutting taxes, consumers will be prompted to spend and businesses will be more likely to invest, ultimately benefitting the public finances through increased tax receipts.
Whether that’s likely to be the case will be a point of serious contention amongst economists and various factions of the Conservative Party, especially given rising inflation and the possible impact on interest rates. Many will see the measures as a serious gamble.
What is certain, however, is that businesses will be more interested in what actually comes to pass than any abstract debate about whether the Government is taking the best course of action.
Our Growth Plan 2022 (‘Mini Budget’) coverage also includes: