Mini-Budget briefing: Going for growth on steroids

Mini-Budget briefing: Going for growth on steroids

“I will be a pro-business, pro-growth, pro-investment Prime Minister on a scale not seen in the past few decades” – Liz Truss, Daily Telegraph, 6 August 2022

During the leadership election, a key element in Liz Truss’ pitch was her promise to deliver higher economic growth in part by challenging Treasury orthodoxy. Today, in the mini-Budget, her Chancellor has turned that election pledge into action. The measures announced are very far from mini with reductions to income tax, National Insurance, Stamp Duty and Corporation Tax. These changes have a very significant cost: on top of the £60bn initial cost of the energy price caps for business and households that were announced earlier this week, the tax reductions announced today will cost £45bn.

The mini-Budget also set the stage for major supply side reforms. Some, including abolishing the bankers’ bonus cap and the establishment of new low tax/low regulation investment zones, were announced today by the Chancellor. Importantly, along with some tax changes affecting investments, he promised an “ambitious package of regulatory reform later in the Autumn.” It was clear that the financial services sector is central to the Chancellor delivering his growth ambitions.

Reforming Solvency II will inevitably be part of that package and an associated document published by the Treasury provided some details about how they intend to make those reforms, alongside changes to pensions regulation, a way to free up billions for investment across the UK. But following the Chancellor’s meeting with key City figures on his first day in office asking for deregulatory ideas, we can expect other financial services reforms to be on the table too – especially those that could give the UK a competitive advantage over the EU. It was not completely unalloyed good news for the financial services sector as the Chancellor announced that the tax surcharge on bank and building society profits, which was due to be reduced to 3 per cent in 2023, would remain at 8 per cent.

Critically, the Chancellor also used his speech to tee up deregulatory announcements from other Ministers in next few weeks. Weeks note, not months. That shows how much the new Ministerial team are aware of how little time there is between now and the next General Election that must be held before the end of January 2025.

It is worth carefully noting the areas where the Chancellor promised changes: speeding up digital infrastructure, reforming business regulation, increasing housing supply though planning changes, improving the immigration system, reducing the cost of childcare, helping agricultural productivity, and “backing” financial services. What that clearly indicates is that plans in these areas are already at a reasonably advanced stage. It is also worth noting that tax simplification has been placed at

the heart of the government agenda, with the Office of Tax Simplification abolished and HM Treasury and HMRC being mandated to simplify the tax code.

Any business or organisation in these sectors affected by regulation, for good or ill, should expect major changes shortly. That is also an opportunity for those that seek changes that are in line with the deregulatory direction of the new Cabinet team to make their case – but move fast or the chance might be lost. The Chancellor also reminded the House of the Government’s commitment to review, repeal or replace all retained EU laws by the end of 2023, a commitment given more focus by the planned sunsetting of retained EU law. To that end, it is significant that the Government also published today the Retained EU Law Bill that allows them to revoke any secondary EU laws without the need for new legislation. Again, once that Bill becomes law, it allows for fast changes to be made.

It is already evident that the mini-Budget tax changes do not come without risk. Government debt is over an eye watering £2.3 trillion and the cost debt interest payments cost £19.4bn last month alone, even before further interest rate hikes expected in the year ahead. The independent Institute for Fiscal Studies has made comparisons to this Growth Plan fiscal event with the Budget introduced by a previous Conservative Chancellor in the 1970s that led to a deep recession and, eventually, a Labour Government. It is always interesting to see the reaction of financial markets to any Budget but never has that been truer than after these sweeping announcements. It is these markets that will ultimately have to fund the extra spending and, critically, the cost of the vastly increased borrowing involved.

The new Chancellor’s approach can be summed up with how he framed the tax reductions he proposed today: “Every additional tax on business is ultimately passed through to families through higher prices, lower pay or lower return on savings.” Lowering and simplifying taxes – and making changes to the supply side will be central to the Government’s approach that seeks to achieve its goal of a “trend rate of growth to 2.5%.” With the economy currently teetering on the edge of recession, getting anywhere close to that figure even in a single year is going to be a challenge – and certainly before the next election.

Key Measures at-a-glance

  • Reverse the rise in National Insurance from 6th November
  • Cancel Corporation Tax increase that would have seen rates rising from 19% to 25%
  • Abolishing the 45% higher rate of income tax
  • Cut basic rate of income tax to 19% from April 2023
  • Reduce Stamp Duty with the zero-rate increasing from £125k to £250k (and £425k for first time buyers)
  • Reversing proposed reduction in the annual investment allowance to £200k, keeping it at £1m permanently
  • Introducing 38 new investment zones with low business taxes and tax reliefs for ten years
  • Doubling share options for employees from £30k to £60k
  • Simplifying IR35 rules by scrapping 2017 and 2021 reforms that added “unnecessary complexity and cost” for many businesses
  • Reintroducing VAT-free shopping for international travellers
Author

Mark MacGregor

I am currently serving as Director of Public Affairs. I am responsible for advising a wide range of organisations about how best to tackle reputational, political and regulatory issues. I work with the Technology, Energy, Healthcare and Business Services sectors and possess 30 years of relevant experience.
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