Liz Truss is on the verge of reversing one of the last major pillars of her chancellor’s disastrous September mini-budget.
While Kwasi Kwarteng mingles with finance ministers at the International Monetary Fund gathering in Washington DC, discussions are taking place in London that would see the promise to freeze corporation tax rates binned. There is also speculation about dropping smaller measures including a more generous tax treatment of share dividends. These U-turns would come hard on the heels of the humiliating climbdown on Kwarteng’s promise to scrap the 45p top rate of tax.
Whether those reversals will be enough to calm the market turmoil that followed the mini-budget remains to be seen.
Here we ask what dropping these measures might save, and what else might be jettisoned or delayed from Kwarteng’s £43bn spending package.
Corporation tax
Kwarteng’s predecessor Rishi Sunak said last year he would reward corporations for making big investments with hefty tax breaks from April 2023, but the price for the move was a rise in corporation tax from 19% to 25%.
Kwarteng said he would reverse the tax rise and the investment relief, adding an annual £19bn to his costs by 2026, the final year of the forecast.
Dividend tax
In April this year, each band of the tax rates applying to dividend income was increased by 1.25% to match the additional 1.25% increase in national insurance contributions.
Kwarteng said in the mini-budget that from 6 April 2023 these increases would be reversed, with dividend tax rates reverting to 7.5%, 32.5% and 38.1%.
He said the move was due to benefit 2.6 million dividend taxpayers, and especially “entrepreneurs and investors across the UK to drive economic growth”.
The cumulative cost was slated to be £2.3bn over the next four years, though only £885m in 2026, meaning that a reversal would only have a small effect on the public finances over the long term.
Income tax cut delayed
Kwarteng pledged to cut the basic rate of income tax – the 20p rate – by 1p next April, bringing it forward from Sunak’s promise of April 2024. The extra cost to the Treasury was slightly more than £5.2bn.
Sunak had already included the cost of the cut from 2024 in his budget estimates so there is no extra cost to the exchequer from the 1p cut other than in the first year.
Treasury forecasts show the 1p cut becoming self financing after just two years before the effect wanes and becomes almost neutral after five years.
A reversal of this measure, delaying it until 2024, would save £5.2bn.
Stamp duty
The chancellor’s wheeze to save the housing market from a dramatic slowdown was a surprise element of the mini-budget. He cut several stamp duty thresholds, mainly to support first-time buyers.
Reversing a cut in stamp duty would save £1.6bn annually from 2026.
Targeted energy bailout
Former chancellor Sajid Javid has urged the government to limit its energy price cap to those who most need it.
At the moment every household will see unit rates frozen this month, no matter how wealthy they are, with no cap on the amount of subsidised energy they use. The government expects this will cost about £90bn over two years. A six-month price cap for businesses will add about £60bn, taking the total rescue package to £150bn.
A more targeted subsidy would need to be paid through the welfare system to universal credit claimants and those who receive disability and other related benefits.
This move could save more than half the cost of the programme, but would undermine one of the chief benefits of a universal scheme, which would be to bring down inflation.
Foreign aid
Last year was the first time since 2013 that the UK failed to meet the UN target of spending 0.7% of its national income (calculated using a measure of gross national income that includes overseas revenues) on aid.
Citing the economic impact of the pandemic, the government said 0.5% of GNI was the most it could afford, reducing the total spent from £14.5bn to £11.1bn.
The chancellor could maintain the cut, saving himself billions of pounds.
Bring forward OBR report
Former chancellor George Osborne has called for an assessment by the Office for Budget Responsibility (OBR) of the public finances and the economic outlook to be brought forward from 31 October.
The OBR is the Treasury’s independent forecaster and must make a judgment on the government’s budget plans at least twice a year. Kwarteng said he will unveil his fiscal plan on 31 October and the OBR report will be published at the same time.
It appears that the chancellor needs the next three weeks to decide how he will balance his budget. His critics say he is stalling. But an earlier announcement could calm markets.
Osborne said, referring to the OBR report: “Given the pain being caused to the real economy by the financial turbulence, it’s not clear why it is in anyone’s interests to wait 18 more days before the inevitable U-turn on the mini budget.”
