Budget September 2022

Today’s post takes a look at the usual speculation in advance of the Mini Budget in September 2022 and at what actually happened.

Mini Budget 2022

I’ve lost count of how many Tory budgets we’ve now had (and Tory PMs and Tory Chancellors) without getting much in the way of Tory policies.

• Perhaps this time will be different.

This is the sixth budget of this parliament, which now has little more than a couple of years to run.

• Strictly speaking, it’s a fiscal event, often known as a mini-budget – this terminology allows the Chancellor to avoid commissioning formal forecasts from the Office for Budget Responsibility.

The idea is that not waiting for the OBS means the fiscal event can happen closer to the end of the Tory leadership campaign.

• We will probably also get a true budget in November.

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New PM Liz Truss and new Chancellor Kwasi Kwarteng need to make an impact quickly, and they arrive in less than promising circumstances:

• Dealing with Covid has cost an absolute fortune (and Boris’ political career)
• Liz has already announced an energy price cap which threatens to cost even more
• We have soaring inflation (largely driven here in Europe by an energy shock, so perhaps the price cap will help, and save some government interest to boot)
• Interest rates are being raised to combat inflation, but the collateral damage could include a recession, high unemployment and lower prices for risk assets

The tabloids wrap this all up as a “cost-of-living crisis” and exhort the government to insulate households from its impact.

• Liz thinks (and I agree) that the only real solution is to grow the economy.

But whether this can be done, and how best to achieve it, are more difficult questions.

At some point, all of this spending will need to be paid for, and if we need tax cuts to grow, then perhaps we should also be talking about how best to shrink the state.

• Unfortunately, all spending cuts are now branded austerity and the hopelessly inefficient NHS is still treated as a national religion.
• To this has been added a second untouchable doctrine – Net Zero.

So what does the media think Kwasi will announce?

Speculation

Remember that a lot of speculation relevant to an investment blog is produced by investment firms and accountants in order to provoke action (overreaction?) from clients and investors in advance of draconian measures that rarely appear.

• This rule may not apply to this budget, since for once we are expecting tax cuts, perhaps to the tune of £30 bn.

Notes in blue indicate what actually happened, which for most Budgets is a lot less than was predicted.

Income tax and NIC

Liz campaigned on rolling back the NIC increase formerly known as the Health and Social Care tax.

• The higher NIC threshold brought in to accompany the tax rise is expected to stay, however.

What we don’t know at the moment is the timing of the reversal (and whether it might even be back-dated).

The associated rise in the tax on dividends is also being scrapped.

• This happened as expected.

Another possibility is an expansion of the Marriage Allowance which allows a high-earning spouse to use some of their partner’s tax-free personal allowance.

• Currently, this is capped at £1,250 for basic rate payers only, but Liza has hinted that she wants to make the whole allowance transferable.

There was no mention of this.

The previous chancellor Rishi Sunak had announced a 1% cut to basic rate income tax from 2024, so it was always possible that this might be brought forward.

• And there had been some discussion that the higher rate income tax threshold could be increased from £50,270 to £80K (which would fit with the growth agenda – see below).

The 1% cut to the basic rate will happen in April 2023, but there was no change to the higher rate threshold.

• A surprise was that the 45% additional rate on income over £150K was scrapped (from April 2023).

Cost of living

The big move here is the energy price cap.

• We already know how this will work for households but we might get more detail on the plan for businesses. (( Business Secretary Jacob Rees-Mogg had a separate speech planned on this topic ))

We should also find out how the scheme will be paid for (eventually).

• A windfall tax on energy firms has been ruled out.

VAT has already been taken off domestic energy bills as part of the cap, but a more general VAT cut had previously been discussed, with 15% the likely new rate.

• There was no VAT cut, and we don’t know how the energy cap will be funded in the long term.

Growth

There is speculation that Kwasi will set a 2.5% pa economic growth target, and lay out some measures designed to achieve that.

• Investment zones with low taxes and low regulation are one option (something like the Enterprise Zones of several decades ago).
• Removing the cap on bankers’ bonuses is another.
• The fiscal rules which require the national debt to start to fall between 2024 and 2025 may also be repealed (or more likely the timescale will be extended).

Investment zones were announced, but it’s little more than a concept at this stage – discussions are ongoing with 38 councils.

Capital gains and Inheritance tax, wealth taxes

The only speculation here was for unspecified changes to the IHT regime.

• There were no changes.

Corporate tax

Corporation tax was due to rise from 19% to 25% in April 2023.

• Kwasi was expected to freeze the tax at 19%.

As mentioned above, a windfall tax on energy companies has been ruled out.

• There was also talk of possible changes to business rates.

The corp tax rise has been cancelled but there were no other announcements.

Investments and pensions

The main item here was expected to be the restoration of the triple lock on the State Pension (the like to earnings was removed last year because of the large rebound in earnings following Covid, but Sunak confirmed that it would return this year).

• The press will make this seem controversial because inflation is currently so high, but keeping the SP up with inflation is one of the things that the triple lock is supposed to do.

No other changes to pensions (such as the scrapping of the LTA) were expected.

• The only pensions change was the raising of the fee cap so that pensions can invest in (expensive) illiquid assets.

Nothing major was expected on ISAs, VCTs or EIS, though as part of the growth initiative, the latter two might be incentivised to invest more in UK startups (now that we are out of the EU).

• They are also subject to sunset clauses in 2025, so it was possible that their continuation could have been confirmed.

The 10-year-old SEIS scheme had its limits updated, and government support for EIS and VCT was confirmed.

Some had called for the penalties on withdrawals from LISAs before the age of 60 to be reduced or scrapped.

• This did not happen.

Property

There was speculation that stamp duty on property purchases might be cut, but no details were available.

• There was a token cut with the increase of the zero tax band from £125K to £250K, and some help for first-time buyers, but the higher rate bands were not touched.

Green stuff

The green levies have been removed from domestic energy bills as part of the energy price cap.

• Some detail on the path to the UK’s commitment to Net Zero was also expected.

I didn’t spot any,

Sin taxes

Fuel duty might be cut to combat the COL.

• It wasn’t, but alcohol duties were frozen.

Surprises

The only one I spotted was the rollback of IR35 to its original setting where the contractor (rather than the employer) assessed the applicability of the legislation to each contract.

Conclusions

This was a very large package of tax cuts (£45 bn excluding the energy price cap) but yet again I am disappointed by a Tory budget.

• 1% off basic rate and 2% off NICs, plus the retention of 19% corporation tax are all welcome but are not exactly game changers.

Scrapping the 45% rate could have been replaced by extending the 20% band up to £80K or £100K pa.

• And scrapping the LTA (and/or the annual contribution cap) would have been a much better motivator for individual enterprise.

The stamp duty trim is particularly infuriating – it takes the duty on a £1M property down from £44K to £42K, and that on a £2M home down from £154K to £152K.

• So it will make no difference at all to the top end of the market.

Until next time.