The not so mini-budget
Officially it was not a Budget, not a formal one at least… it was a mini-budget.
But it was a mini-budget of staggering size.
With the exception of the unprecedented COVID-19 support package, this was easily the largest fiscal announcement in recent years and quite a way for the new Chancellor, Kwasi Kwarteng, to announce himself on the world stage.
Dubbed by many as the ‘not so mini-budget’ it packed a huge punch with the Chancellor grabbing headlines by announcing that:
- National Insurance would be cut by £17bn
- Income tax will be cut by £7bn
- Corporation tax will be cut by £12bn (the proposed increase will not now happen)
Coupled with the scrapping of planned rises in alcohol duties and a significant increase in the starting threshold for stamp duty, the budget is thought to have amounted to a £45bn tax cut.
Given the increase in support for both households and businesses with respect to energy bills, borrowing will increase substantially. The Chancellor announced an additional £72bn of government borrowing will be required in the current financial year.
To drive economic growth.
Annual growth of 2.5% is the new desired ‘average’ over the medium term with the Chancellor saying:
“Growth is not as high as it should be. This has made it harder to pay for public services requiring taxes to rise, in turn, higher taxes on capital, higher taxes on labour, have lowered returns on investment and work, reducing economic incentives and hampering growth still further."
Citing the UK’s relatively poor performance in terms of business investment when compared to the rest of the G7, he announced a ‘new era’ that will see growth driven in a low tax environment.
Drawing unfavourable comparisons with the 1972 Budget that lead to a period of boom and bust, however, the Chancellor was accused of replacing actual tax with an ‘assumption of extra tax revenue’ by one commentator.
Mixed, to put it politely.
Many commentators question the wisdom of cutting taxes so aggressively whilst inflation remains high with Bloomberg reporting that there is now a rising expectation that the Bank of England could increase interest rates by a full 1% next month.
The cost of government borrowing soared to 4% from 3.1% earlier this week - it stood at 1.8% when the Conservative Party leadership contest started - the Pound slumped further still against both the US Dollar and Euro and both the FTSE 100 and 250 fell sharply.
The main thinking? The Chancellor has been a little cagey with the numbers. He decided that a forecast by the Independent Office for Budget Responsibility was not necessary (at this stage) as this was not a formal budget.
Some commentators found this a little concerning given the size of the tax cuts and the amount of borrowing required.
The Institute for Fiscal Studies (IFS) was scathing in its assessment with Paul Johnson, IFS Director, saying that the Chancellor had “announced the biggest package of tax cuts in 50 years without even a semblance of an effort to make the public finance numbers add up”
But other business groups were more positive.
The Federation of Small Businesses (FSB) welcomed the reductions in National Insurance and corporation tax and announced that the mini-budget was a “good moment” for small businesses across the UK, declaring that the ‘Truss Government is off to a flying start”.
The CBI was slightly more cautious declaring it a “turning point for our economy”, before adding “It’s not perfect - it’s just the beginning - but there’s plenty business can work with.”
Niyi Idowu, Partner at ATN Partnership said:
“Taking the politics out of things I have to say that the financial support regarding energy bills is extremely welcome, as is the scrapping of the rise in corporation tax and reversal of national insurance increases.
Both the optimism and criticism appears perfectly justified. I welcome any government that prioritises economic growth”
Tahmina Ahmed, Senior Client Manager at ATN Partnership, said:
“One announcement that we really, really welcome is the reversal of the reforms to IR35. It hasn’t really received much coverage, but the 2017 and 2021 reforms were a nightmare for contractors and seeing them scrapped is a very positive move”