With £45bn worth of tax cuts, growth at all costs was the overarching message of Kwasi Kwarteng’s speech announcing the Government’s fiscal measures.
With much of the statement leaked in advance, the speech itself was as much about the defiance and determination of what the Chancellor dubbed the ‘new era’ than the actual measures it announced. The major elements of tax cuts, investment zones, and deregulation were as expected, bar the decision to abolish the highest rate of tax, with concerns about inflation batted aside.
The focus of the speech was on the Government’s approach to delivering growth (trend rate 2.5%), which has three major planks according to Kwarteng: reforming the supply the side of the economy through tax incentives and reform; taking a responsible approach to the public finances; and cutting taxes to improve growth.
As far as supply-side reform goes, this was certainly radical for something that isn’t meant to be a Budget. There were sweeping tax cuts – NICS rise cancelled, 1p tax cut brought forward from basic rate, top rate of income tax abolished, corporation tax rise cancelled, banker bonus cap removed, alcohol duty freeze, low tax investment zones, stamp duty cut – all designed to stimulate growth. It is clear beyond these cuts there are wider reforms across business, regulation and planning all designed to do the same. For businesses, this is certainly a Government willing to listen to, embrace and action ideas that support growth. Day one is seeing business tax burdens reduced across the board.
Kwarteng’s speech also made clear that this fiscal statement would not be the end of new policies designed to support businesses, particularly financial services, with another package of regulatory reforms in late Autumn. The Business Secretary, Jacob Rees-Mogg, is due to announce an additional package of business reforms imminently. The Treasury will be pushing ahead with plans to make it easier for pension funds to invest in less liquid but potentially higher return sectors like venture capital.
Elsewhere there were bold announcements in line with the pro-enterprise, pro-growth approach including new restrictions on trade unions protecting minimum service levels and requiring member votes on pay offers. So too would there be significant planning reforms to reinvigorate development across the UK in specific investment zones.
No doubt aware of the alarm this mini-budget could cause in the markets, Kwarteng also used the speech to dampen fears. He made clear the Government’s belief that the independence of the Bank of England was ‘sacrosanct’ and that it remained committed to strengthening the financial services sector as a key method of encouraging growth. He also sought to placate concerns on borrowing by making clear the Government’s plan to reduce debt as a percentage of GDP over the medium term, a shift away from the most recent fiscal rules outlined by Rishi Sunak.
Labour’s response touched on familiar themes as they sought to portray Liz Truss’s premiership as a Government pursuing an elitist agenda and cleaning up its own mess. Truss and Kwarteng’s policies have drawn a sharp distinction between the Conservatives and the opposition giving Labour plenty of ammunition for speeches. However, as Reeves’ speech showed the lack of clarity about Labour’s own economic plans makes it harder for the opposition to land significant blows.
Ultimately this was a radical fiscal statement that clearly contains some risk. The initial market reaction has not been favourable. But businesses should be clear that this is Government prepared to take action that is ideologically focussed on promoting the private sector and its role. That is set against a backdrop of a view that the time has come for the approach to fiscal management to change. Time will tell if the balance has been correctly struck. The train of reform does not stop here, and the Government will want results soon.
Tax cuts were a focus of Liz Truss’ leadership campaign, and this was followed through in this fiscal event with Kwasi Kwarteng pledging to increase the incentives to work and innovate by:
- * Scrapping the planned 1.25% increase in national insurance
* Bringing forward the 1% cut in income tax from 2024 to next year
* Abolishing the top rate of income tax, leaving the 40% higher tax rate as the highest remaining bracket
* Cutting stamp duty by raising the untaxed proportion of the house price value for both first time and other buyers
* Freeze alcohol duty from February 2023
* Introduce a digital VAT- free shopping scheme for international tourists outside of airports
* The annual Investment allowance for plant and machinery will be permanently set at £1 million from April 1 next year
* The company share option plan will allow businesses to offer employees £60,000 worth of share options rather than £30,000
* The seed enterprise investment scheme has been widened to allow firms to raise £250,000 under the scheme
Kwarteng also revealed that the Government was in negotiations with 38 council to create investment zones designed to stimulate regional economic growth. These zones will feature:
- * Reduced taxes to encourage investment with employers exempt from paying national insurance on new hires in these areas up to the value of £50,000. This would also include the elimination of business rates in these areas
* Designated development zones with dramatically reduced planning requirements
* Limited regulation to ease the burden on businesses
The Chancellor argued in his speech that the current state of planning laws in the UK frustrated investment and left the UK uncompetitive internationally. He pledged to tackle this with a new planning bill due to be introduced late this year. The bill will:
- * Streamline assessments, appraisals and consultations
* Accelerate the building of nationally significant infrastructure projects by reducing restrictions
* Increase the disposal of unused Government land to increase the availability to house builders
Bankers Bonus Cap
- * The Government will be removing the retained EU Law which caps bonuses for bankers at twice annual pay in an effort to encourage more financial services firms to locate staff in the UK.
* When making the case for the measure Kwarteng argued that ‘a strong UK economy has always depended on a strong financial services sector
In this speech the Chancellor made clear his belief that trade unions were harming growth in the UK. He pledged to tackle this by:
- * Introducing minimum services levels as is the case in much mainland Europe to keep essential services running
* Introducing a new requirement forcing Unions to submit all pay proposals to a member vote before any strike action could take place
As part of the Government’s plan to tackle inflation through supply side reforms it plans to push more people into work by reforming the benefits system. The Government plans to:
- * Reduce the payments of Universal Credit claimants who are not making active measures to find work
Kwarteng also used the speech to reaffirm the Government’s plans on for energy, even though most of these were unveiled already yesterday. This includes the following:
- * Energy bills for households have been capped at 2,500 a year for two years, which the Government predicts will save the average household £1,000
* Bills will also be capped for six months to businesses, charities and public sector organisations
* The total cost of these measures is expected to be in the region of £60bn according to the Government
The Government also pledged to:
- * Proceed with ongoing reforms to the pension charge cap allowing for greater investment in private and high growth asset classes
During the statement the Chancellor made it clear that the Government would be introducing:
- * New fiscal rules to explain the Treasury’s new approach to borrowing
* A package of regulatory reforms to ease the burden on businesses
* A planning reform Bill