What might (and might not) be in the Emergency Budget/Fiscal Event proposals on 23 September 2022

It is important to keep in mind that the new chancellor will not be delivering a “full Budget” but a “low fat” version which has widely been described as a ‘Fiscal Event’.

It is expected to provide more detail of the proposed energy package, including the Energy Price Guarantee (EPG), and add some flesh to the bones of the tax changes the Prime Minister (PM) promised in her leadership campaign. But, of course, nobody can be absolutely sure.

What Liz Truss said in the leadership campaign

Alongside substantially untargeted support for individuals and businesses in the form of the energy Price Cap, during the leadership campaign Liz Truss talked of making tax cuts amounting to around £30bn a year, with some reductions taking effect immediately.

Below are the aspirations for her time in government so not all will be incorporated into the Fiscal Event, and a full Budget is still likely later this year, probably in November.

The PM is firmly in favour of reducing corporation tax (CT). It is widely expected that the Fiscal Event will include an announcement that the increase in CT from April 2023, already legislated for in the Finance Act 2021, will be reversed.

The PM has talked generally about boosting support for businesses in the UK. As well as the retention of the current CT rate there could also be changes to capital allowances, specifically the continuation in some form of the super deduction, which is currently due to expire next April. The last but one Chancellor, Rishi Sunak, started a review of the capital allowances regime.

The PM also promised to remove much of the EU-derived “red tape” that (allegedly) inhibits activity as part of a long-term plan for economic growth, for example the cap on bankers’ bonuses. She and her chancellor have set a target of 2.5% a year GDP growth, against an OBR long term projection in its July 2022 Fiscal Risks and Sustainability Report of 1.4%. Since 2010, UK GDP growth has averaged 1.5% and, outside the COVID spike of 2021, annual growth has only been above 2.5% once, in 2014.

Like many politicians before her, Truss has talked about reforms to business rates. She has also promised to review of the IR35 rules (off-payroll working) with the aim of sparking a “small business and self-employed revolution”. During the leadership campaign Truss set her tax reform sights wider, promising to “have a complete review of the tax system”.

VAT has always been in her sights – she has always voted in favour of capping VAT rates, so in theory she may turn to cutting VAT as a first port of call. In practice this would be very expensive (about £7.5bn per 1% cut in the standard rate) and, given the cost of the energy price support and immediate tax cutting plans, lower VAT looks highly unlikely in the near term.

Truss has remained strongly in favour of increasing personal income tax allowances over the past few years and there have been rumours that her team are considering increases in personal tax allowances and the basic rate band as part of a cost-of-living support package (see below). This would be a costly move and, notably, no direct mention of it was made during the campaign. However, her repeated commitment to reverse the April 2022 National Insurance Contributions (NICs) increase for individuals and employers is highly likely to happen – probably with an announcement this week. Whether this means reversing the NIC threshold increases that took effect from 6 July (and took some low earners out of NIC altogether) is not clear.

The PM appears set against any form of additional “Windfall Tax” on any sector – including energy. However, Sunak’s windfall tax was not described as such – he carefully used the term Energy Profits Levy.

Another late campaign commitment to “no new taxes” when she is Prime Minister is the clearest statement of her views on tax policy: holding to that promise may be a difficult task for her new Chancellor. It has unfortunate echoes of the promise in the Conservatives’ 2019 manifesto not to increases NIC rates and to maintain the pensions triple lock.

Kwasi Kwarteng , the new Chancellor, is thought to be closely aligned with the PM’s stated economic policies, including on windfall taxes, raising income tax thresholds and reductions in capital gains tax.

So, what could be in the Fiscal Event proposals?

The energy crisis has had a huge impact on individuals and businesses across the UK and is by no means over. Driven by the Russian invasion of Ukraine, short term solutions to the crisis are complex. The focus from the new PM has so far has been mostly on supporting 28 million households through the winter, with measures for businesses less fully formed.

The Government’s planned intervention in the wholesale energy markets will effectively introduce a £2,500 energy price cap for households for two years, while retaining the measures announced in May. However, an ‘equivalent guarantee’ for business, charities and public sector organisations will only last six months. The PM promised longer term energy costs support for ‘vulnerable sectors’ (e.g. pubs) and an interim review in January 2023. While this will come as a huge relief for all, it leaves open the question of whether there will be further support announced in the Budget. There are already suggestions that the business proposals will not take effect until November. It was also announced on Wednesday 21st September that the UK will cut the wholesale price of energy for businesses and public organisations by more than half this winter.

A reduction in business rates for smaller businesses (e.g. an increase in the small business rate 100% exemption to cover properties with a rateable value of up to £25,000, up from the current £12,000) and a possible extension of the existing 50% relief for retail, hospitality and leisure businesses have been rumoured to be part of a COVID style support package that is being considered.

Similarly, a temporary reduction in the rate of VAT applied to hospitality and leisure sales may be announced to help support those sectors as struggling consumers cut back on leisure spending.

Businesses (and individuals) can expect to benefit from the reversal of the April 2022 NIC increase, although how quickly this will flow through to pay packets is uncertain.

Formal confirmation that the corporation tax rate will not rise to 25% in April 2023 (as previously planned) may also be a comfort, even if it provides little help in the short term and will not affect businesses with profits below £50,000 – which may be a substantial number if recession bites.

One other Truss proposal to help family finances that might emerge relates to the transfer of personal allowances between married couples and civil partners. Currently, where an individual does not have enough income to fully use their personal tax allowance (currently £12,570), they can elect to transfer £1,260 of their allowance to their spouse/civil partner, provided that spouse/partner pays no more than basic rate. Truss has proposed that the full allowance should be transferable to help couples where one spouse is the sole earner. Such a move could be costly – the current 10% of personal allowance version costs about £600m a year.

It is not thought that the increase to dividend taxation (introduced at the same time as the NIC increase) will be removed as no mention has been made of this.

Some have suggested that the PM/Chancellor will bring forward the planned reduction in the basic rate of income tax by 1% in April 2024 (cost about £6bn a year).

It is thought unlikely that tax thresholds will be unfrozen early and similarly no change to capital taxation (inheritance tax/capital gains tax is expected. Any moves in these areas are more likely to appear – if at all – in an Autumn Budget.

No change to the current system of and levels of pension tax relief is expected.

In Summary

The new PM and her Chancellor not only have to tackle the energy cost crisis, but must also address the growing public backlash against soaring profits for energy producers. Truss has argued strongly against the windfall tax on energy companies and ruled out any extension of Sunak’s profits levy. Her aim instead is to negotiate long term (e.g. 15 years) fixed price deals with energy generators at prices well below current levels. Arguably, denying herself the stick of a windfall tax has made such negotiations more difficult, so it is possible that – as has happened with banks – a differential corporation tax rate is proposed if negotiations fail.

It will be left to the Chancellor to announce the Treasury’s estimate cost of the Energy Price Guarantee and associated measures as part of his Emergency Budget and set out how the Government will finance that cost. There will be no Office for Budget Responsibility (OBR) assessment of the Treasury’s calculations, despite the OBR having signalled that it was ready to undertake the work. The most recent OBR Economic and Fiscal Outlook, prepared in the first half of March, is now woefully out of date.

Yet another squeeze on Whitehall waste (but no detail) has been promised. While an explicit return to ‘austerity’ seems highly unlikely, in practice something similar is already happening because the departmental allocations made in last year’s spending review were fixed in cash terms, meaning their real value has already been hit by much higher inflation than assumed.

So where does the money come from?

Certainly not increased taxation it seems, although with inflation lingering around 10%, the taxing impact of fiscal drag should not be forgotten.

Much of the justification for tax cuts and the material increase in spending appears to rest on the theory that lower taxes generate economic growth which in turn will generate a more than compensatory taxation yield. Grey hairs may spot shades of Anthony Barber in 1972 or, more recently, Donald Trump’s corporate tax cuts. Barber didn’t go too well and Trump’s cuts mostly found their way into share buybacks.

Many economists and independent commentators, such as the Institute for Fiscal Studies, believe that cutting taxes (and thereby increasing government borrowing) at a time of high inflation is risky: the total national debt is currently 95.5% of the UK’s GDP. Servicing costs on that debt will rise as interest rates are increased by the Bank of England and gilt yields increase. In 2022/23, debt interest could reach £100bn (over 4% GDP). As a parallel, few businesses would seek to borrow to invest during difficult economic times, with many choosing to preserve cash balances, only taking on new debt if absolutely necessary.

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Source: Techlink.