23 Sep 2022

The mini-Budget: a temporary sticking plaster?

At the time of writing (23rd September) this article was factually accurate and reflected changes proposed by the Government. Further announcements have been made since publication which supersede the changes mentioned below.

In a bid to combat what is fast becoming a state of financial emergency, the Government has announced a raft of changes to monetary policies in what was originally billed to be a ‘mini-Budget’. In reality the announcements made are anything but mini with some suggesting that we haven’t seen tax cuts like this since the 80s.

It begs the question, ‘Do we trust in Truss?’ The Prime Minister needed to stick to the promises made when running for the position but she seems to have gone a lot further and has rolled the dice on some high-stakes gambles providing tax cuts amounting to around £45 billion; in essence a U-turn on the previous 12 years of Tory rule.

The Government’s intended support over the coming months – particularly in keeping businesses’ energy bills capped – will undoubtably help a lot of people and will provide support to businesses in the retail, leisure and care industries throughout the colder months. However, this package is only due to run for the next six months at a suspected cost to the Treasury of £60 billion so it feels as though uncertainty has simply been kicked down a road that we’re starting to run out of.

Whilst the energy support schemes are very welcome, it would make sense to put more weight behind offering businesses greater incentives for research and development (R&D) projects that focus on reducing our reliance on fossil fuels and to consider bringing back previously scrapped tax breaks for investing in energy efficient plant and machinery. This would progress the UK’s aims to improve its home-grown energy supply and reduce the need for domestic fracking.

Various surprises in the Chancellors' anything-but-mini-Budget go some way to encouraging investment. April 2023 will see a rise in the funding a business can raise under the Seed Enterprise Investment Scheme from £150,000 to £250,000 and the annual investor limit for individuals will double. Start-ups are expected to be the main beneficiaries of this and, given that the UK is a hub of start-up innovation within sectors such as tech and energy, there’s scope for a great deal of growth here. The announcement that the planned Annual Investment Allowance reduction will be scrapped, with the allowance to permanently remain at £1,000,000, is also a big positive for businesses looking to grow and invest in energy saving equipment.

The cancellation of the planned increase in corporation tax from 19% to 25% from April 2023 is a welcome move, particularly for small businesses who are already feeling the pressure of inflation and increased energy prices.

On the personal side, there were certainly some surprises in Kwasi Kwarteng’s 30 minutes of fame; the plan to cancel an increase in National Insurance contributions was almost a certainty but cutting the basic rate of income tax from 20% to 19%, and scrapping the 38.1% tax rate on dividends and 45% rate of tax for employed high earners were tax rabbits we didn’t expect to be pulled from the Treasury hat.

‘Radical changes’ to SDLT were also announced that will give buyers an extra wedge of cash in their pocket, or extra capacity to borrow.

With one foot already in a recession, the question is whether or not the Government’s growth plans and tax cuts will soothe the UK’s worries.

Kwarteng has warned the Bank of England against blaming the war in Ukraine on our soaring inflation and an interest rate rise of 0.5% to 2.25% (the seventh consecutive rate rise in a row and the highest rate since 2008) is aimed at encouraging people to borrow less and spend less – to stave off further rises in inflation.

Some of the measures announced today seem to be designed to encourage businesses and higher earners to spend more rather than save, with the SDLT cuts intended to drive movement in the housing market. Truss’s government faces the challenge of getting growth back to a target of 2.5% and it’s hoped that these cuts will go some way to supporting that – but at what cost?

It’s reported that the amount of borrowing required by the government to finance these moves is upwards of £100 billion. Together with the economic stimulus that the tax cuts and energy packages are likely to provide, we could see interest rates rising even further in future. Apart from the reduction in basic rate tax there is very little in these announcements that helps low income households with the growing cost of living crisis so the true impact of Truss’s plans remains to be seen.

On the face of it this ‘mini-Budget’ has some positives and we could see businesses start to reconsider their investment strategies. However, in the longer term, these cuts may also just be a temporary sticking plaster to mask the core issues that this government really needs to address.

Stephanie Hurst