What has already been announced?
Growth targets Kwarteng’s message is that Britain can grow faster if the private sector is freed from burdensome taxes and regulations. The chancellor claimed this week that it was possible to raise trend national income (GDP) growth to 2.5% if his plans are implemented. During the past 12 years of Conservative administrations, GDP growth has averaged close to 1.5% and wages for most workers have stagnated. The Institute for Fiscal Studies (IFS) thinktank said there was little evidence that tax cuts and deregulation offered a “miracle cure” to boost growth. He said ahead of the mini-budget that “plans backed by the idea that tax cuts will provide a lasting boost to growth are a gamble, at best.” Energy bill support An emergency price cap for the next two years of £2,500 on the average household’s annual energy bill was announced by Liz Truss in her first week as Prime Minister. It was accompanied by a freeze on business accounts to last at least six months, details of which were announced on Wednesday. Truss said it would cap companies’ energy costs at £211 per megawatt hour for electricity and £75 for gas, around half the wholesale market price. Most analysts have predicted that the government will need to spend more than £100bn on the household cap. The business protection bill could cost up to £50bn. Both bailouts could prove more expensive if the war in Ukraine worsens and natural gas prices jump from the current £424 a thermometer, although the cost to the Treasury could be reduced if wholesale natural gas prices gas continue to fall from the ceiling of 700 pounds per heat. August returns to pre-pandemic level of £30 per heat. National insurance The Treasury announced on Thursday that a 1.25 percentage point increase in national insurance contributions for employees and employers, introduced by the then chancellor Rishi Sunak from April 6 to fund health and social care, would be reversed by on November 6 at a cost of £13 billion. The increase in the cap on workers’ NIC payments introduced by Sunak, which delivers £330 to all NI payers, will remain, at a cost of £6bn.
What to expect on Friday?
Further tax cuts Kwarteng is expected to confirm that he is in favor of a low and simple business tax. The basic corporate tax rate will remain at 19% rather than rising to 25% and Sunak’s planned accompanying investment relief will be abandoned. Proposals to push through a planned cut in personal income tax from 2024 to next year are understood to be still being debated and the move could be the focus of a full budget statement later this year. The IFS said a four-year freeze on personal limits designed by Sunak would generate £1.5bn in the first year of operation and £8bn by 2025/26. But with inflation well above estimates made last March, Kwarteng appears to be preparing to scrap the measure. Speculation that there will be a cut in stamp duty to boost property transactions could be eased. Estate agents said that if the policy focused on cheaper homes, it would do little to encourage trade in the south east of England. Unlimited bankers’ bonuses A cap on bankers’ bonuses is set to be lifted as part of wider moves to loosen the City’s rulebook. Kwarteng and Truss believe London’s post-Brexit position should be strengthened in the eyes of the financial sector and with a bonus cap, top executives will refuse to relocate from Singapore, New York and Zurich. Truss said the measure would “help Britain become more competitive, help Britain become more attractive, help flow more investment into our country”. Extra spending Defense spending will rise from 2% of GDP to 3% of GDP over time, Truss said, adding £20-30bn to government spending. Additional pensions and benefits costs, linked to inflation, and an estimated £18bn hole in public sector budgets, which is likely to grow once higher energy bills are factored in, will add to the government’s financial commitments, the IFS reported. Financial rules Sunak’s drivers were two rules governing the amount that could be borrowed over a three-year period. The first forced him to reduce public sector debt as a percentage of GDP every year. The second meant that “in normal times the state should only borrow to invest in our future growth and prosperity.” Such is Kwarteng’s spending scale, both rules should be redesigned. Additional borrowing over the next two years is expected to exceed £200bn, pushing UK debt to GDP above 100%, likely permanently, unless the government believes that growth-generating tax cuts such as has described IFS as a gamble, it pays off. Kwarteng’s lack of official scrutiny has prevented the independent Office for Budget Responsibility (OBR) from judging the impact of his mini-budget. The fiscal supervisor would usually provide a forecast of the likely increase in borrowing and tax revenue. There will also be a broader view of the economic impact and how much the economy will grow over the next five years. The chancellor has famously taken issue with OBR assessments in the past, deeming them too pessimistic about the power of tax cuts to improve long-term rates of sustainable growth.
