Emergency Statement on the Mini-Budget 2022

Chancellor's Statement 17 October 2022

Key points

New Chancellor Jeremy Hunt made a statement today, bringing forward measures from the Medium-Term Fiscal Plan that will support fiscal sustainability
These measures were later confirmed in Parliament
Corporation Tax will rise to 25% from 1 April 2023
Basic rate of income tax to remain at 20p indefinitely
Key Mini Budget tax measures announced on 23 September scrapped
Energy price cap to be for only 6 months instead of two years
Scrapping of off-payroll measures (IR35) reversed
£72bn public finance hole needs to be plugged

Following his appointment as Chancellor last week, and his reversal of key Mini-Budget measures, new Chancellor Jeremy Hunt is fast-tracking announcements two weeks ahead of the Medium-Term Fiscal Plan.

The Chancellor will still deliver the full Medium-Term Fiscal Plan to be published alongside a forecast from the independent Office for Budget Responsibility on 31 October.

Chancellor's morning Statement - key points

The Chancellor's statement this morning was later confirmed in the House of Commons:

Corporation Tax will go up to 25% from April 2023
Reversal of almost all Mini Budget tax measures not yet through Parliament
Stamp Duty cut in the Mini Budget is safe
Dividend tax rates to stay as they are - they were meant to be reduced next April
Off payroll rules (IR35) will no longer be scrapped
Income Tax basic rate to stay at 20p indefinitely (and allowances remain frozen)
VAT-free shopping scheme for non-UK visitors to Great Britain scrapped
The freeze to alcohol duty rates announced in the Mini Budget is scrapped.
£32bn raised by these measures (about equivalent of 5% on Income Tax)
Energy Price Guarantee - support only until April 2023 rather than for two years
A Treasury-led review of future energy support beyond April 2023

What are also safe are the following:

Reversal of the NIC rise from 6 November
Making permanent the £1m Annual Investment Allowance
Enhancements to the Seed Enterprise Investment Scheme
Extension to the Company Share Option Plan rules

These statements are meant to calm the markets and restore stability in the UK economy following the 23 September Mini Budget measures which unveiled an unfunded energy price cap and tax cuts.

Chancellor's Statement to House of Commons

Following on from this morning's announcements, the Chancellor confirmed the measures in Parliament.

He additionally signalled his support for the Investment Zones announced in the Mini Budget.

On pensions, whilst Prime Minister Truss had previously guaranteed these would rise in line with inflation, the Chancellor made clear that a promise to stay with the triple lock no longer stood.

Hunt acknowledged the lack of an OBR report to back up the Mini Budget and sought to clarify Treasury policy going forward.

He hinted at cuts in departmental spending ahead which may mark a new period of belt tightening. However, whilst he was keen to make clear that this did not mean Austerity version 2, there were some “eye-wateringly difficult” decisions ahead to balance the books.

The changes announced to tax policies today are estimated to be worth around £32bn a year, but final costings will be published as part of the Medium-Term Fiscal Plan alongside an OBR forecast on 31 October 2022.

A new external economic advisory panel will be set up to provide expert advice to the Treasury.

Comment

The 23 September Mini Budget now seems like a bad dream from which we have emerged with a jolt. The plans for all out-growth previously announced are being replaced by tax increases and spending cuts; hardly the policies that will boost growth. The policies of Rishi Sunak have largely returned.

Shortening the time that the energy price cap will remain in place may please the markets as it limits the government's debt exposure but will worry households and businesses. Wholesale gas prices remain volatile, and the Treasury may well be forced into extending energy support after April 2023 in a more targeted way if energy rates remain high.

Curtailing the energy price cap after just six months with no extension may also lead to higher inflation after April next year and act as a hurdle to growth. This may lead to interest rates having to rise to keep a check on inflation.

Interestingly, when asked, the Chancellor did not rule out a windfall tax on energy companies: "I am not against the principle of taxing profits that are genuine windfalls... nothing is off the table". Contrast that to the Prime Minister's previous statements that there would be no windfall tax.

Keeping the 1.25% increase in dividend tax rates whilst scrapping the same rise on NICs seems unfair on shareholder/directors who take dividends. Why are they being penalised in this way other than perhaps being sent a message that the government wants to make taking dividends instead of salary less attractive?

Owner managers trying to decide what salary/dividends mix to take from April next year will find that the tax implications of both will largely be the same. What could make a difference, however, are commercial decisions, or where pensions and R&D Tax Credits are relevant to make salary more attractive.

Or another thought, maybe NIC rates will go up again from Next April? Hunt didn't want to make another NIC change this year.

Public Finances

The measures announced today account for around £11bn of the extra £45bn of borrowing by 2026/27 created by the 23 September Mini Budget. The U-turn on abolishing the top 45% rate of tax (outside Scotland) and Friday’s decision to keep the already legislated for corporation tax increases were worth about £21 bn, implying that over 70% of Kwasi Kwarteng’s planned borrowing has now disappeared.

Based on recent analysis by the Institute for Fiscal Studies, the 2026/27 financing black hole that remains after all the unwinding is about £32 bn, although it appears that the OBR could add at least another £10bn to that projection.

The Chancellor made clear that there will be “more difficult decisions” to come on both tax and spending. Government departments will be asked to find efficiencies within their budgets.

Further changes to fiscal policy to put the public finances on a sustainable footing will be announced on 31 October.

Post Mini-Budget developments prior to today

Markets spooked by unfunded tax-cuts and open Energy Price cap
45p Income Tax rate cut reversed
Jeremy Hunt replaced Kwasi Kwarteng as Chancellor
Mini Budget U-Turn on tax measures
Corporation Tax will rise by 6% to 25% from 1 April 2023
Proposed 1p cut off Income Tax expected to be delayed by a year until April 2024
Bank of England will review interest rates on 3 November 2022