Chancellor Kwasi Kwarteng delivered his mini-budget on Friday

By Suzanne Evans, Director, Political Insight

As promised, Chancellor Kwasi Kwarteng delivered his mini-budget on Friday. It included the following major tax reforms:

• Corporation Tax remains at 19%, with the planned rise to 25% cancelled

• Reversal of the planned 1.25% rise in National Insurance contributions and the proposed Health and Social Care Tax

• Basic rate of Income Tax cut to 19% in April 2023, a year earlier than anticipated

• Additional rate of tax to be abolished from April 2023, replaced by a single higher rate Income Tax of 40%

• IR35 reform repealed from April 2023

• Stamp Duty Land Tax: nil-band doubled to £250,000 and first time buyers’ exemption increased from £300,000 to £425,000, effective immediately

• Alcohol duty frozen from February 2023

• A new digital, VAT-free shopping scheme for international tourists

• No changes to Capital Gains Tax, Inheritance Tax or VAT.

The Treasury estimates these tax cuts will cost nearly £45bn a year in 2026. The total package would be funded by increasing borrowing of £72.4bn. The Chancellor also doubled the amount on employee share options companies can offer as part of the Company Share Option Plan to £60,000, and widened the criteria of the Seed Enterprise Investment Scheme (SEIS), allowing firms to raise £250,000 under the scheme – a 66% increase. The Annual Investment Allowance was also set permanently at its highest ever level of £1 million from 1 April 2023, giving 100% tax relief to businesses on their plant. The government will also establish 38 new Investment Zones in England which will benefit from tax cuts and liberalised planning rules. Kwarteng also announced plans to accelerate new roads, rail, and energy infrastructure; and adjusted regulations to increase pension fund investment into UK assets. He also announced plans to encourage people on low incomes to secure more and better paid work, and legislation requiring trade unions to put pay offers to a member vote so strikes can only be called once negotiations have fully broken down. He also confirmed that the EU-imposed cap on bankers’ bonuses will be scrapped, and the measures to support businesses and households in a time of rising energy bills already reported.

Market Reaction: Sterling responded negatively to the mini-budget. The pound declined as much as 3% against the US dollar, falling to $1.109 and inching closer to its all-time low of $1.0520. At the time of writing it stands 1.2% further down at $1.0714. Chris Beauchamp, chief market analyst at online trading platform IG told Yahoo Finance UK: "We have to go back to March 2020 and the wild swings of the pandemic to find a time when the pound last suffered such a terrible week against the US dollar. Those hoping for a vote of confidence from the market in the government’s ambitious tax-cutting programme have been sorely disappointed; instead of giving people reason to be confident about the UK economy, they seem merely to have provided another reason to flock to the safety of the dollar”. Bond markets immediately spiked higher on the prospect of a big surge in government borrowing via additional gilt sales of £62.4bn. The yield (an implied borrowing cost for the government) on 10-year gilts, which was 3.495% at the close of business on Thursday evening surged to as much as 3.842% at one stage - a level not seen since April 2011. The FTSE 100 traded down, but broadly in line with continental European indices.

Think-tanks and commentators: The mini-budget received a mixed response. The Institute for Economic Affairs welcomed it, with Director Mark Littlewood saying: “Only by bearing down on the amount of tax the state collects across the income spectrum, and reducing the regulatory burden, can we create better conditions for growth”. Robert Colville, Director at the Centre for Policy Studies said: “This Government has been bold and ambitious in pursuing a pro-growth agenda – not just for now, but over the long term. However, Money Saving Expert Martin Lewis described it on Twitter as 'staggering', adding: 'I really hope it works. I really worry what happens if it doesn't.' Paul Johnson, director of the Institute for Fiscal Studies, appeared unimpressed, saying: “Kwarteng is betting the house with his vast tax cuts.” “Kwarteng has shown himself willing to gamble with fiscal sustainability in order to push through these huge tax cuts, he added. “He is willing to shrug off the risks of inflation, and to invite significantly higher interest rates. Injecting demand into this high-inflation economy leaves the government pulling in the exact opposite direction to the Bank of England, who are likely to raise rates in response. Ruth Gregory, senior UK economist at Capital Economics also described the mini-budget at as “gamble,” telling the Daily Mail: “The Chancellor claimed that this was a plan for growth but unless…the government's fiscal policy boosts GDP growth by 0.5-1.0ppts per annum, the risk is that once the near-term boost to GDP fades, the legacy of the government's fiscal plans will be higher interest rates and a higher public debt burden. The market reaction, which included a jump in gilt yields means higher borrowing costs are already here”.  Alison Hill, tax partner at PwC said: “Overhaul of income taxes will make Britain stand out” with abolition of the top rate of income tax as “one of the biggest Budget shocks in recent memory”.

“If this was a 'mini-Budget' it begs the question what is the Chancellor saving for the full Budget?” she added.

Read the Political Insight view of the mini-budget:https://www.politicalinsightuk.com/minibudget2022-the-political-insight-view/

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