Chancellor Kwasi Kwarteng will make his maiden fiscal statement tomorrow announcing a radical shift in the UK’s economic policy mix at a time when households and businesses are suffering from record energy prices, eye-watering inflation and a looming recession.
Here is what to expect from the mini-budget:
Liz Truss has announced an emergency price cap on household energy bills for two years and an equivalent freeze for businesses for six months. The government will intervene in the Ofgem price cap to limit companies’ energy costs to £211 per megawatt hour for electricity and £75 for gas, about half the market price. Household bills will be frozen at an average of £2,500 a year from October and the chancellor will detail in his fiscal statement how much these interventions will cost the exchequer. Most economists have put the bill at more than £100 billion, with a potentially limitless expense if wholesale prices continue to rocket.
Kwarteng has used the run-up to the mini-budget to emphasise that the government will focus all its attention on raising the UK’s level of trend GDP growth to 2.5 per cent, primarily through tax cuts and deregulation. Average GDP growth stands at close to 1.5 per cent and has taken significant hits since the financial crisis, Brexit and the pandemic. The Institute for Fiscal Studies has warned that there is no “miracle cure” for boosting growth. “Plans underpinned by the idea that tax cuts will deliver a sustained boost to growth is a gamble, at best,” they warn.
What we could expect:
The chancellor will confirm a freeze to corporation tax at 19 per cent and scrap this year’s 1.25 percentage point increase in national insurance contributions, measures that will cost the exchequer £30 billion a year. As reported by The Times, the chancellor is also poised to announce a reduction in stamp duty as part of the tax-cutting bonanza. The government is also considering bringing forward a planned 1p cut in personal income tax from 2024 to next year, although this may be delayed until the main budget later this autumn. Measures to unfreeze personal tax thresholds could also be announced later this year.
Kwarteng and Truss have defended a move to scrap a cap on bankers’ bonuses, a legacy of the UK’s membership of the European Union. The cap was introduced in the aftermath of the financial crisis to prevent bankers taking undue financial risks that would result in larger one-off bonuses. Truss has said that scrapping the cap, despite being unpopular with voters, was a measure to “help Britain become more competitive, help Britain become more attractive, help more investment flow into our country”.
The scale of borrowing to be undertaken by the government means that fiscal targets set by the last chancellor are likely to be scrapped and replaced. The US bank Citi estimates that the government will be borrowing upwards of £200 billion for the next two years to pay for the energy cap, raising the country’s debt-to-GDP ratio above 100 per cent. The UK’s fiscal rulebook is consistently re-written by new chancellors. Expect Kwarteng to do the same.
What he should do
The government has not asked the independent Office for Budget Responsibility (OBR) to publish its assessment of the mini-budget’s impact on the public finances. He should. Without its judgment MPs, economists and the financial markets will be left scrambling to understand the true impact of the measures on the short and medium-term health of the economy. The OBR’s last forecast was in March, after which the growth outlook and fiscal policy has undergone huge changes.