Individuals and organisations alike have sought urgent help as the economy has been battered by the effects of COVID and the civilised world’s attempts to curtail Russia’s Ukrainian ambitions. In particular, fuel, energy, food and many other goods have witnessed inflationary pressures not seen for decades as a result of a broken global economy following the post-COVID restart, the weaponisation of gas and oil, and the effective closing of Ukraine’s ports.
A series of lifelines may well have been provided by the new chancellor, Kwasi Kwarteng, in what was termed by many a “mini-budget”, but by the government as The Growth Plan 2022. The tools deployed by Kwarteng were in stark contrast to those used by previous chancellors who latterly wound the tax burden up to its highest level since the 1940s. And the use of those tools has created much disquiet, and a U-turn.
Sky’s economics and data editor Ed Conway commented that the Treasury and Bank of England are “desperately concerned… over the market reaction to the chancellor’s economic plan”. He added that: “I’ve been reporting on budgets for 20 years now, and I can’t remember another budget – Labour, Coalition or Conservatives – that has had anything like this reaction.”
How does the “mini-budget” impact veterinary practice?
Notably, many are wondering what the Bank of England does next. On the one hand the government says it’s not changing course – a point driven home the weekend after the mini-budget when the chancellor said that he intended to cut more taxes. But as a country we’ve committed to borrowing hundreds of billions more pounds; the rate has got much more expensive and this will put pressure on the Bank of England potentially to raise interest rates and very soon too.
So, to the mini-budget and starting with the “pre-announcements” a few days before the event, the chancellor reiterated that households would see their energy bills capped at £2,500 for an average household. On top of that there would be £400 given in instalments over a six-month period from October. Those off the gas grid – for example, on oil or LPG – would be given £100 on top of that sum. The government reckons that the average householder will be “better off” by £2,200. That’s a relative term, however, considering the marked increase in the cost of energy this year.
That [businesses] will also be able to benefit from the same cap per unit of energy as will apply to households was welcomed. However, it will only apply for six months, not two years
There is assistance for businesses too, as many ordinarily viable firms faced going to the wall. So, the government’s announcement that they will also be able to benefit from the same cap per unit of energy as will apply to households was welcomed. However, it will only apply for six months, not two years. On current prices the help will take an estimated 45 percent off bills.
The chancellor noted that “the consensus amongst independent forecasters is that the government’s energy plan will reduce peak inflation by around five percentage points”. If that is the case then individuals, businesses and the government will be mightily relieved.
However, the six-month initial period is a worry; it’s not going to help businesses plan for anything but the short-term.
Corporation and income tax
Moving to those measures actually announced in the mini-budget, with an eye to encouraging as many overseas firms as possible to base themselves in the UK, the planned rise in corporation tax from 19 to 25 percent in April 2023 has been shelved. The argument used is that while individual firms may pay less tax, that deficit will be made up through a greater number of corporate taxpayers liable to pay tax.
Corporates – large and small – seeking to invest in plant and equipment will also be pleased that the annual investment allowance (AIA) threshold has been permanently set at £1 million, rather than reverting to £200,000 from April 2023. This is a 100 percent capital allowance for qualifying expenditure.
Other business-related changes are the creation of new investment zones that will be granted lower tax rates and easier planning rules; an expansion of the Seed Enterprise Investment Scheme (SEIS) to help start-ups raise finance; and an expansion of the Company Share Option Plan (CSOP) scheme which allows companies to tax-efficiently grant shares to full-time directors.
Corporates – large and small – seeking to invest in plant and equipment will also be pleased that the annual investment allowance (AIA) threshold has been permanently set at £1 million, rather than reverting to £200,000 from April 2023
For individuals, the chancellor brought forward from 2024 to 2023 a 1p cut in income tax, down from 20p to 19p in the pound. While the cut applies to those currently earning between £12,571 and £50,270, surprisingly the chancellor moved to help high-rate taxpayers and abolished the 45 percent highest tax band for those on more than £150,000. Again, the thinking is that it encourages “enterprise and growth” and should help to keep the economy spinning by giving the wealthy more to spend. However, barely 10 days after the mini-budget the chancellor was forced to recant this last particular cut. It caused much outrage and was politically unacceptable.
The scrapping of some of the IR35 rules will be welcomed by practices who will no longer have the burden of checking employment status of staff. However, that problem will be passed back to locums who will either ignore the rule or be tied up in knots having to defend their status.
Many will decry the removal of the cap on bankers’ bonuses which has the potential to appear obscene. But the idea is to have more of those well-paid bankers earning and paying tax in the UK rather than overseas. Again, it is hoped that their conspicuous spending will benefit the wider economy.
Those buying homes will have more left in their pockets through an immediate cut in stamp duty for transactions in England and Northern Ireland. In detail, the chancellor raised the threshold before stamp duty is paid to £250,000 from £125,000 and gave more assistance to first-time buyers. They formerly paid nothing on purchases below £300,000 but will benefit from an increase in the threshold to £425,000. Even better, that help now applies to homes valued up to £625,000 rather than £500,000 previously.
And for those fond of a drink at the end of the working day, there is succour in knowing that the planned increases in the duty rates for beer, cider, wine and spirits have all been cancelled. Similarly, there’s an 18-month transitional process for wine duty and an extension of draught relief on smaller kegs of 20 litres and above to help smaller breweries.
So, why all of the tax cuts and why now? Very simply, the economy is heading for a recession if it’s not in one now and the government – backed by reams of statistics – wants to minimise the fallout from this and instead, grow GDP by 2.5 percent a year. The chancellor is firmly of the view that tax cuts will “turn the vicious cycle of stagnation into a virtuous cycle of growth”. However, others think that interest rates could rise to 5 percent or more next year as inflation may be exacerbated by the changes.
And the foreign exchange markets weren’t convinced either – sterling dropped as investors worried about the level of debt that the government is about to take on at a time when the Bank of England was to sell off some of the government debt it holds. It’s perfectly arguable, in fact, that all of the chancellor’s giveaways will be negated – by some margin – through increases in both the cost of borrowing as the Bank of England moves to support the pound and the cost of imports as sterling flounders.
Ultimately, the Truss administration believes in individuals keeping as much of their money as possible – especially the wealthy who will benefit proportionately more from the tax cuts. It wants the public and business to spend more so that it trickles down through the economy.
But Samuel Mather-Holgate of Swindon-based advisory firm Mather & Murray Financial said that “the markets clearly don’t think [the chancellor’s] budget is credible, so some of his policies need to be re-thought and then retracted… this country is being run by a confederacy of dunces”.
Similarly, Rob Gill, managing director at mortgage broker Altura Mortgage Finance, commented that “a currency in freefall, the soaring cost of borrowing and a government and central bank pulling in opposite directions is the stuff of a banana republic”.
With more gravitas, President Biden recently spoke about the concept of trickle-down economics mid-September. Both he and the money markets reckon that the tax cuts are ultimately destined to fail.
Maybe they will, but only time will tell.