We are now officially in a recession and moving into a period of fiscal thrift that can be painted as Austerity 2.0. Not because the Chancellor has swung an axe, however, but rather because he has pegged public sector spending to just below the rate of annual growth while freezing tax thresholds.
The problem for the Chancellor is, of course, that a general election is now only two years away, the question that will inevitably be at the front of voters’ minds is whether they feel better off now than at the last election.
Lowering tax thresholds for upper rate taxpayers, from £150,000 to £125,000, will generate headlines along with increases in the Energy Profits Levy (Windfall Tax) from 25% to 35%, with a new 45% tax for electricity generators, and £6bn for improving the nation’s insulation and energy efficiency (in 2025 to 2028).
An uprating of welfare payments and pension credits linked to inflation, as well as further cost of living payments along with extra money for the NHS will all be welcomed. However, getting into the detail of what it all means for households will be a key influencing factor for voters. This means the Chancellor may well have to revisit the headline cap for energy bills in his Spring Budget if the promised deal with President Biden on the purchase of cheap Liquid Natural Gas doesn’t drive down energy prices in the meantime.
Businesses will be pleased that the Chancellor is looking to apply a £14bn tax cut on business rates, but this will be partly offset by the freezing of the national insurance threshold for employer contributions, which will raise £5.8bn by 2028. There was nothing in the speech that spoke to support for energy costs for businesses other than the promise that the Treasury will lead a review of the Energy Bill Relief Scheme (EBRS) which will determine the support for non-domestic energy consumption beyond March 2023. It will be 31 December 2022 before businesses know if they will receive any help or not. So good news for pubs and restaurants but not so good for energy-intensive industries.
Overall, the budget feels mature if a little tepid. Treasury press officers had spent a couple of weeks briefing out the worst-case scenario and the Chancellor judged what went down well and what went down badly and cut his cloth accordingly. It was more about freezing than abolishing things, with many forecasted measures postponed until after the general election. The statement had two competing objectives – to be seen as fair and targeted in the eyes of the voting public and to reassure the financial markets that the Government can stabilise the economy in the wake of the last fiscal statement.
- A significant acknowledgement that the UK is now in recession.
- OBR says the UK economy will shrink by 1.4% next year, with inflation to be an average of 7.4%.
- Growth forecasts have been adjusted to 1.3% for 2024, 2.6% for 2025, and 2.7% in 2026.
- Unemployment will rise from 3.6% to 4.9% in 2024.
- Confirmation that the UK will borrow 7.1% of GDP or £177bn this financial year. This is significantly up on the previous forecast in March when OBR’s forecast was a deficit of 3.9% of GDP or around £98bn.
- The ONS has said real household disposable income per person is set to fall 4.3% in the 2022-23 fiscal year, which would be the largest drop since records began in 1956-57.
- Income Tax – The top rate of tax will be paid on earnings over £125,140, instead of £150,000, and the income tax personal allowance and higher rate thresholds will be frozen for a further two years until April 2028.
- Capital gains – There will be a big increase in the capital gains burden, with the tax-free allowances for dividend and CGT due to be cut next year and in 2024.
- Road Tax – The Chancellor announced electric vehicles will no longer be exempt from Vehicle Excise Duty from April 2025 to make the motoring tax system "fairer". This will mean electric cars, vans and motorcycles will begin to pay VED in the same way as petrol and diesel vehicles.
- Business rates and tax contributions – The Chancellor is looking to soften a blow for businesses on rates with an almost £14bn tax cut on business rates, however the freezing to the national insurance threshold for employer contributions will cost businesses a further £5.8bn by 2028.
- Windful taxes – Energy firms will be hit with an expanded windfall tax of 35%, up from the 25% already levied.
- Regulation – The Government will review retained EU law to identify changes that can be made over the next year with the greatest potential to unlock growth in key growth industries - digital technology, life sciences, green industries, financial services, and advanced manufacturing.
- Tax relief for R&D – Linking to reports of abuse and fraud the Government will cut the deduction rate for the SME scheme to 86% and the credit rate to 10% but increase the rate of the separate R&D expenditure credit from 13% to 20%.
- International Tax – Following consultation, the Government will legislate to implement the globally agreed G20-OECD Inclusive Framework Pillar 2 framework in the UK. This will introduce an Income Inclusion Rule (IIR) which will require large UK headquartered multinational groups to pay a top-up tax where their foreign operations have an effective tax rate of less than 15%.
Financial Services and Housing
- Regulation – There will be no rewrite of the remit given to the Bank of England, which was a policy Truss had announced.
- Stamp Duty – The stamp duty cuts announced in the mini-budget will remain in place but only until 31st March 2025. The Chancellor said that change would now be temporary, “creating an incentive to support the housing market and the jobs associated with it by boosting transactions during the period the economy most needs it”.
- Housing and mortgage forecast – The OBR has forecast that house prices would fall 9% between the fourth quarter of 2022 and the third quarter of 2024. The average interest rates on outstanding mortgages are expected to peak at 5% in the second half of 2024 (this is 1.8% points above the forecast in March).
- Bank levy – Following the decision to proceed with the corporation tax rate increase to 25% from April 2023, the changes to the bank corporation tax surcharge which are legislated to take effect from the same point will also go ahead. This means that from April 2023 banks will be charged an additional 3% rate on their profits above £100 million.
- Capital reforms – The Government has today published a consultation response setting out the final reforms of Solvency II, with the aim that this will release “tens of billions of pounds” of capital to be spent on infrastructure.
Energy, Infrastructure, Innovation
- Investment – The Government’s capital budgets are set to be squeezed in real terms in two years. The Government will also refocus the Investment Zones programme to catalyse a limited number of high-potential clusters with further details to be announced in the coming months.
- Infrastructure – Sizewell C, HS2 to Manchester, core Northern Powerhouse Rail, East-West Rail, New Hospitals Program, and gigabit broadband rollout will all be funded as promised.
- Energy efficiency – The Chancellor said he will double investment in energy efficiency of homes and industry by £6bn from 2025 as part of the work of the Energy Efficiency Taskforce.
Cost of living support
- Energy – The energy price guarantee will be kept for a further 12 months at an average of £3,000 for a typical household, up from £2,500 at present.
- Wages – The “national living wage” will rise by 9.7% next year to £10.42 an hour.
- Pensions – Confirmation that the pensions triple lock is kept meaning a 10.1 per cent boost for pensioners next April, and the Government’s review of the state pension age will be published in early 2023.
Public sector and spending
- NHS – There will be an increase to the NHS budget in the next two years by an extra £3.3bn, and former Labour minister Patricia Hewitt has been asked to advise on improving NHS efficiency.
- Education – The budgets of UK schools will be increased, with an additional £2.3 billion allocated each year.
- Aid – Overseas aid will not now return to 0.7% of GDP, from the reduced 0.5%, for at least five years.