Over the past few weeks, the Treasury has been undertaking what commentators have termed 'expectation management' ahead of the Autumn Statement on November 17.
The Chancellor Jeremy Hunt is considering £60billion in tax rises and £35billion in spending cuts to address a black hole of up to £50billion in the public finances.
He will set out his plans in the Autumn Statement on November 17 - we take a look at the facts so far and ask finance experts on what is likely to be announced.
Energy windfall tax
With BP unveiling profits that doubled to more than £7.1billion and Shell announcing £8.2bn profit in the three months to September, pressure is continuing to mount for an enhanced windfall tax on oil and gas giants to help fill the Treasury coffers. COP26 president Alok Sharma, who was demoted from the Cabinet by Mr Sunak, said: “We need to raise more money from a windfall tax on oil and gas companies and actively encourage them to invest in renewables.”
However, Chris Denning, head of corporate international tax at MHA, questions whether the right strategy.
He said: "The simple truth is this won’t be enough to fill the UK’s fiscal deficit of £50bn. Even supposing oil and gas profits rise by 6 times, a 10% increase in the windfall tax rate only fills in 4% of the ‘black hole.’
"This is certainly no ‘silver bullet.’ Crucially it needs to be weighed against the potential further negative impact an increase would have on UK investment decisions."
He added: “Government policy should focus on incentivising investment in grid infrastructure, better connectivity and scalable energy storage capacity rather than power generation, which in the future would shelter the UK from the short term price volatility it is currently exposed to in order to balance the grid and keep the lights on.”
Tax rises
Unemployment could also rise by around half a million, the report suggests, with the weaker economic outlook bringing borrowing up by around £20bn a year by 2026-27. “The Government has a little over two weeks to finalise its plans to repair its economic credibility and the sustainability of the public finances,” said James Smith, research director at the Resolution Foundation.
Investment Zones
The Investment Zones unveiled by Kwasi Kwarteng haven't been scrapped - -yet - but will they be slimmed down?
The advantages of investment zones for business include tax benefits for capital allowances, stamp duty land tax (SDLT) and business rates relief for ten years.
But the Financial Times is reporting that the idea, mooted by Liz Truss, may well be scrapped in favour of a revamped urban generation policy, favoured by Levelling Up secretary Michael Gove.
READ MORE: What are investment zones and will they boost the UK economy
A report by Osborne Clarke states that there could be 'a scaling down of the project – with perhaps a cap being put on the number of zones.'
Jon Hickman, Corporate Tax Partner at BDO said: " Whether the proposed Investment Zones go ahead exactly as planned remains to be seen given their projected £12bn a year price tag. If they do survive then it seems likely that a ‘light’ version will go ahead with the tax reliefs available scaled back to reduce the cost to the Exchequer."
Infrastructure projects
Michael Gove has suggested investment could be slashed - including in the HS2 rail line. High Speed 2 was already cut back under former transport secretary Grant Shapps, with the eastern Leg no longer going to Leeds.
But hinting it could be slashed again, Mr Gove, the Levelling-Up Secretary, warned: “I’m sure that some capital spending will be cut. I am sure everything will be reviewed."
Meanwhile there are reports that Liz Truss's pledge to build Northern Powerhouse Rail, including a station in Bradford will be cut or scaled back. Instead, the Government may re-use a lot of existing track on the east-west line.
Jon Hickman, Corporate Tax Partner at BDO said that reforms allowing pension schemes to invest in more UK infrastructure project may be brought forward 'especially if the government scales back its own direct infrastructure investments'.
Public spending cuts
The Autumn Statement was delayed from its original date on Halloween was so that new Cabinet ministers would have time to look at spending cuts.
Mr Hunt has warned no area of government will be exempt from so-called efficiency savings, despite many of them being in crisis after years of austerity starting under David Cameron and George Osborne.
Analysis by The Resolution Foundation states: “With inflation at its highest level for 40 years, Government departments are already seeing their budgets fall in real terms by around £22bn by 2024-25. It is hard to see how the Treasury could credibly save more than £20bn by announcing cuts to day-to-day public service spending”.
Pensions and benefits
The Resolution Foundation study suggests the new administration could save £9bn by choosing not to raise benefits and pensions in line with rising prices next year. It said any such move would have a “huge” impact on those struggling, with a low-income working family with two children losing around £750 and a pensioner £342.
Millions of pensioners could lose out on promised cash as Mr Hunt and Mr Sunak have refused to commit to the pension triple lock.
The triple lock sees pension payments increase in line with whichever is the highest of average growth in earnings, prices or 2.5%.
Mr Hunt could decide that pensions should only rise in line with earnings rather than the current 10.1 per cent inflation rate.
Mr Hunt could also decide to uprate the likes of Universal Credit in line with earnings instead of inflation.
National Insurance
One option open to the Prime Minister and Chancellor would be to “go full circle” on the mini-budget by reinstating the health and social care levy, originally due to apply from April 2023 – a move that would raise £15bn by 2026-27.
A decision by Kwasi Kwarteng to scrap the temporary 1.25% rise in national insurance contributions from 6 November 2022 has been upheld by Mr Hunt and will now continue to apply from 6 April 2023.
Law and financial services firm Osborne Clarke LLP observes in this article: "While it might be politically awkward to increase the rates of national insurance contributions, it is possible that the impact of the recent reversal could be scaled back in some way. The government might also consider reintroducing a form of levy to pay for health and social care at a future point in time."
Income Tax
Around £2bn could also be raised by extending the “stealth” freezes in income tax thresholds by a further year to 2026-27.
It means that workers who get a wage hike may find themselves included in the band above.
That’s because while salaries rise, the tax threshold stays the same, and so you get dragged into paying higher rates.
Tax thresholds would usually be tweaked to take into account inflation and rises in earnings
In the 2021 Spring Statement, when Sunak was Chancellor, he introduced a four-year freeze on tax thresholds with people expected to pay the 40 per cent rate on earnings of £50,271 and the 45 per cent top rate at £150,000 until 2025-26.
The personal allowance – the point at which workers start paying income tax – was also frozen, at £12,570 from April 2022 until 2025-26.
Fuel Duty
Motorists benefited from a 5p per litre cut for petrol and diesel cars outlined in the Spring Statement.
But the 12-month measure only lasts until the end of March 2023.
Business Rates
There is currently 50 per cent business rate relief in place for retail, hospitality and leisure businesses and firms have previously indicated that they want support to go further.
However, Mr Hickman said that post-Covid business rates support is winding down and it seems highly unlikely that reductions in Business Rates will continue.
"Indeed, the new regime of faster revaluations may be used to increase the tax take," he observed.
Labour is calling on the chancellor to axe the planned inflation-linked increase to business rates from April 2023 and is calling for a complete tax overhaul for small-and-medium sized enterprises.
It echoes the message from the CBI, supported by the British Retail Consortium (BRC).
Matthew Fell, CBI Chief Policy Director, said:
“We are asking Government to smooth the looming Business Rates cliff edge; without intervention, the eye-watering rises scheduled for April will present an existential threat for many businesses which communities depend on."
Apprenticeship Levy
Jon Hickman, Corporate Tax Partner at BDO said that among the less headline grabbing changes may be the previously promised overhaul of the Apprenticeship Levy. He said it would be widely welcomed by businesses if it leads to simplification of the rules.
Further youth training schemes may also be announced as Sunak himself did during the Covid-19 pandemic, he predicts.
Helen Dickinson, Chief Executive of the British Retail Consortium, is calling for reform of the scheme to prevent 'missed employment opportunities, missed training, and missed career progression.'
The [retail] industry needs a higher skilled, more productive, and better paid workforce but this broken system is holding this back. Government must make the Levy more flexible so retailers can use the funds for high quality pre-employment courses, short in-work developmental courses and to cover other costs related to training their people.”
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