Not so mini-Budget!

23 Sep 2022

Paul Brown provides his expert commentary on today’s fiscal statement…

For a speech that lasted less than half an hour, Kwasi Kwarteng’s first “fiscal event” was undoubtedly action-packed…

Some of the measures had as ever been trailed well in advance, but there will still be plenty of surprises in what was, in effect, trickle-down economics writ large.

After rehearsing details of the energy support measures announced earlier in the week, the Chancellor stated that this was a new approach for a new, post-Elizabethan era with an objective of a trend rate of growth of 2.5%. This does not feel hugely ambitious, and it was interesting that this is a “medium-term” goal. What medium-term means wasn’t clear, but the Chancellor said we shouldn’t expect immediate results!

There are three planks to reform the supply side of the economy, maintain fiscal responsibility and cut taxes. Keeping fiscal responsibility while cutting taxes seems a hard circle to square, so this will be an interesting ride!

On the supply side, there is much detail to come. There were the much-trailed measures to incentives those on benefits to get back into jobs. Although cutting benefits can truly be said to be “making work pay”, I’m not sure. Curbs will also be introduced to reduce the impact of strike action.

At the same time, the work of our much-loved City of London bankers will certainly be able to pay more with the cap on their bonuses removed (it never worked anyway, it seems).  

There will also be a new network of low regulation, low tax investment zones to drive economic activity. There will be accelerated tax reliefs for capital investment, no SDLT on commercial property and no business rates in these zones. Employees will be paid up to £50k before the employer’s NIC will be payable.  

Discussion is underway to determine where these much-favoured zones will be – clearly, being “in the club” will be of benefit, but how does this then impact investment in areas that are not in these zones? Will this persuade mobile businesses to leave those less favoured areas, and what does that do for jobs and the economy there? It seems like a risk of creating a two-speed economy to me.

Tax reform – and then some!

The real action came in the last part of the speech with a raft of tax changes. No one will be surprised by the reversal of the NIC (and dividend tax) rise from November onwards – although it will create another headache for employers when managing their payrolls! It must be great fun to work for a payroll software provider at the moment.

Also, no big surprise that the corporation tax increase planned for April next year will now be cancelled. It is pleasing that someone has finally confirmed that the annual investment allowance for capital expenditure will be fixed permanently at £1 million. The annual process of “will they, won’t they” keep it at £1 million was a hassle we could well do without.

One interesting point which will hopefully come out in the detail relates to the super deduction for plant and machinery. This enhanced deduction expires on 31 March 2023 and was intended to drive investment ahead of the corporation tax rise. There were clawback provisions which effectively died once we got past the CT rise – will these now be extended given that any balancing adjustment on a sale will now be taxed at 19%, not 25%?

The IR35 rules for individuals working through their own companies introduced in 2017 and 2020 will be repealed. This system has caused more heartache and (now wasted) effort for many businesses, so many will say good riddance. However, while the system’s design was frankly rubbish, the underlying issue it was trying to attack remains, so I’m not convinced that doing away with it altogether is the right answer.

The 0% SDLT threshold will be increased from £125k to £250k, and for first-time buyers, which will increase to £425k. Others will be no better, but I didn’t get the sense that the housing market was slowing down massively, so I’m not sure of the logic for this change.  

The real rabbit out of the hat was that the additional rate of income tax (45% for most types of income, 38.1% for dividends) would be abolished from April 2023. I didn’t see any speculation about this as a measure, and those earning over £150k per year will no doubt be delighted.  

The basic rate of tax will be reduced at the same time to 19% from 20%. This is always a great headline grabber, but the maximum it will save any individual will be a shade over £375 a year – welcome but hardly life-changing. Selfishly there is also no way I will be able to work out 19% in my head while I had a chance with 20%!

The overall approach was much as expected but with a few surprises. As for trickle-down economics, that is well above my pay grade to comment on, although the government only has a short time before the next election for it to work.  

The big question to me is whether business owners, relieved of the burden of higher CT and income tax rates, will rush to make new investments or pass on the benefits in wage rises to their employees or not. If they do, the boost to the economy should be very real – but if they decide just to accumulate the additional cash themselves, then I fear these measures may well not have the effect the Government state they want.

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