Jeremy Hunt, the new (and fourth this year) Chancellor of the Exchequer, sought to calm markets and reassure both international investors and the public of the need to provide confidence and stability in the light of a chaotic month in UK economic policy.
His reversal of almost all of the tax measures introduced by his predecessor, Kwasi Kwarteng, heralds the end of prime minister Liz Truss’s economic plan only a matter of weeks after she came to office.
IPM Chief Economist
18th October 2022
The abandonment of the abolition of the 45% additional income tax rate, the indefinite postponement of a cut to the basic rate of income tax to 19%, the cancellation of IR35 reforms, VAT-free shopping for international tourists and the freeze in alcohol duty came alongside the confirmation that corporation tax will rise from 19% to 25% in April 2023 as planned by Rishi Sunak.
The changes to Stamp Duty (some of which are already in place) and the abolition of Sunak’s Health and Social Care Levy (an additional 1.25 percentage point on all rates of national insurance) will go ahead, though will continue to apply to dividends.
Together, the reversal of these measures will gain the Treasury an additional £32bn per year, but this is still insufficient to close the fiscal hole in the UK government’s finances which have deteriorated through higher inflation placing pressures on departmental budgets set last year, as well as higher debt interest costs incurred through the chaos of recent weeks and a general backdrop of internationally rising interest rates.
The Energy Price Guarantee, announced on the day of the Queen’s death, initially planned to be in place for two years until September 2024 will now, in its current form, come to an end in March 2023. A Treasury review will, before then, bring forward a new plan to cost the government significantly less, whilst ensuring support for those in the most need and better incentivising energy efficiency. This will bring the support for households closer to that already announced for businesses, along with the insecurity that they were already facing.
Reforms to the energy price measures must be brought forward as quickly as possible to provide reassurance to both households and businesses. A lack of clarity over the potential size of energy bills beyond March will cause significant concern to both domestic and commercial users, as many businesses on our high streets are already amongst the most energy-intensive sectors in the UK and will now be facing higher inflation into 2023 as result of the expected changes to this policy.
Challenges for future investment in place
But of greater concern is where the government goes from here. There are still many billions to be found to close the gap in the government’s finances, and departments have been told, once again, to find efficiency savings and prepare for more cuts, and businesses and consumers to expect further tax rises. The government’s mantra is still to go for growth, but this cannot and will not be achieved without significant investment in places across the UK.
Local authorities and place managers spend far too much time repeatedly bidding for small pots of money instead of being freed to deliver to the investments that they know will create growth and economic opportunity in their areas. Confidence and stability are as important at a place level as they are at a national one. They can only truly be delivered by a calm and measured approach that puts long-term viability, resilience, and funding above short-term political goals.
The success of the UK economy is dependent upon the success of the places within it. In balancing the books of the Treasury, economic opportunity of our places must be balanced as well. The Chancellor has calmed the nerves of the international bond markets: he must now do the same for our places.