Here’s the full details of the tax cuts which have been abandoned by chancellor Jeremy Hunt, as he tries to preserve economic stability and show the markets Britain is committed to fiscal discipline.
Cutting the basic rate of income tax to 19% from April 2023. While the government aims to proceed with the cut in due course, this will only take place when economic conditions allow for it and a change is affordable. The basic rate of income tax will therefore remain at 20% indefinitely. This is worth around £6 billion a year.
Cutting dividends tax by 1.25 percentage points from April 2023. The 1.25 percentage points increase, which took effect in April 2022, will now remain in place. This is valued at around £1 billion a year.
Repealing the 2017 and 2021 reforms to the off-payroll working rules (also known as IR35) from April 2023. The reforms will now remain in place. This will cut the cost of the government’s Growth Plan by around £2 billion a year.
Introducing a new VAT-free shopping scheme for non-UK visitors to Great Britain. Not proceeding with this scheme is worth around £2 billion a year.
Freezing alcohol duty rates from 1 February 2023 for a year. Not proceeding with the freeze is worth approximately £600 million a year. The next steps of the Alcohol Duty Review announced in Growth Plan 2022 will continue as planned. The alcohol duty uprating decision and interactions with the wider reforms to alcohol duties under the Alcohol Duty Review will be considered in due course.
This is on top of abandoning the abolition of the top rate of income tax, and proceeding with the increase in the corporation tax rate.
Jeremy Hunt has not yet done enough to plug the gap in the government’s fiscal plans, warns Paul Johnson, head of the Institute for Fiscal Studies.
Last week, the IFS estimated that £60bn of savings were needed to get debt falling as a share of GDP, while there are reports that the Office for Budget Responsibility sees a £70bn black hole.
Either way, today’s £32bn of tax rises would only take the Chancellor part way there. The fact that today’s announcements alone are unlikely to be enough is a measure of the scale of the problems we face.
But if the outlook for the cost of government borrowing improves, the fiscal gap will shrink – potentially by £7bn, Johnson explains:
Early indicators suggest that gilt rates may be reduced by perhaps as much as 0.5 percentage points. If this were to be sustained, and extend to a correspondingly lower path for Bank Rate, OBR ready reckoners suggest that debt interest spending would be reduced by around £7bn a year.
Having undone the big package of tax cuts Mr Hunt might now be able to delay big decisions on public spending – but still need to show a credible fiscal plan, Johnson concludes:
That is likely to involve at least some cuts to planned investment and day-to-day spending. There are no easy options here.
It is hard to see which of the big chunks of spending – health, pensions, welfare, education and defence – can be cut.
With the mini-budget consigned to history, economists and investors are concluding that Liz Truss’s term in office might soon be over too.
Charles Hepworth, investment director at GAM Investments says calm has returned to markets, thanks to Jeremy Hunt’s announcements….and expectations of a new PM soon as well.
All of this is due to the screeching handbrake turn in the Truss economic motorcade now that a new driver is at the wheel. Chancellor Hunt’s immediate efforts to get out on the front foot, bring forward his plans, and importantly, more openly, is a stark contrast with the previous Chancellor’s almost embarrassed, muffled, and tone-deaf performance.
“Almost all of PM Truss’s economic vision is gone and most of her leadership election promises. The income tax cut plan has been shelved indefinitely and the UK energy support scheme will apply now for just six months. Gone are virtually all the unfunded tax cut promises from the previous Chancellor and markets are of the view that soon so too will be the original architect of the failed mini-Budget.”
Paul Dales, chief UK economist at Capital Economics, says Hunt has essentially wiped out Truss and Kwarteng’s plans:
Altering Truss’s flagship policy in this way is the surest sign yet that Liz Truss won’t be Prime Minister for long. After all, pretty much everything she has done in the past 42 days has now been reversed by Hunt over a long weekend.
Uncertainty over Truss’s position as PM could mean more volatility for the pound, warns Fawad Razaqzada, market analyst at City Index and FOREX.com
Investors are wary of the political situation, which remains tense, and a lot could still change. For now, there is a bit of hope that Jeremy Hunt will help bring the country’s public finances back in order. But his work is undermining under-pressure PM Liz Truss, who some argue is on borrowed time.
As a result, traders remain very cautious, and thus unwilling to commit in one or other direction. This should mean continued volatility for sterling.
Sterling has rallied back over $1.13 against the US dollar, now up a cent and a half today.
That recovers Friday’s losses, when the pound weakened after Liz Truss’s short press conference following Kwasi Kwarteng’s sacking.
Britain’s short-term borrowing costs have dropped to their lowest since the mini-budget rocked the markets three weeks ago.
Two-year UK bonds have continued to rally as the bond traders welcome Jeremy Hunt’s move towards fiscal responsibility.
This has pushed the yield (interest rate) on two-year gilts as low as 3.525%, according to TradeWeb data, which is the lowest the mini-budget on 23rd September.
These short-term bond yields are used to price fixed-term mortgages, so today’s falls could help to calm that market.
During the Conservative party leadership race, Liz Truss criticised Rishi Sunak for raising taxes to their highest level in 70 years.
But today’s junking of Truss’s mini-budget means that taxes are still heading towards the highest level since the early 1950s, seven decades ago.
Resolution Foundation has worked out that taxes, as a share of economic output, are on track to hit 36%:
Torsten Bell, chief executive of the Resolution Foundation, says the speed of the turnaround under Jeremy Hunt is ‘stark’:
This is now very clearly a tax raising parliament, with the tax take set to reach highs not sustained since 1950. The price of shielding the public finances from wholesale gas markets next year is more pressure on households, with the energy price cap now on course to hit £4,000 next April – almost double its effective level today.
“These are tough choices being made by the new Chancellor, that will reduce the scale of public spending cuts set to be announced on 31st October – even more so if they lead markets to reduce the interest rates they charge government for borrowing.
“But, with tens of billions of spending cuts still to come, and a new energy support package needing to be devised, many of Jeremy Hunt’s tough choices still lie ahead.”
The downside of making the public finances less exposed to soaring gas prices is that households will be more exposed.
Resolution Foundation’s Torsten Bell explains that ending the universal energy price cap ends next April (18 months earlier than Liz Truss planned) is basically a gamble that wholesale gas prices don’t surge again….
Hunt’s decision to downgrade Liz Truss’s two-year energy price freeze to just six months will shock struggling families, say Laura Suter, head of personal finance at AJ Bell.
“Scrapping all but six months of the Energy Price Guarantee will send shockwaves through households in the UK, who are once again going to be exposed to soaring energy prices and the prospect of a struggle to pay their bills.
The indication from Mr Hunt is that help will be targeted at those who need it the most from April onwards, rather than universal support regardless of income.
However, there’s no guarantee that the support will be meaningful after April.”
Suter also explains that abandoning the cut in the basic rate of income tax will cost taxpayers up to £377 a year in additional tax compared to Liz Truss’ previous plans.
“That sound you can hear is the death knell for Trussonomics, with the vast majority of her tax cutting plans now consigned to the bin. People have had yogurt in their fridge that’s lasted longer than some of the Government’s planned tax cuts, and it’s clear that Liz Truss has opted to have one last attempt at saving her skin by ditching her economic principles rather than try to cling on to her policy plans.
“But many Tory party members who voted for her will wonder what the point of Truss is without Trussonomics, particularly as she now has the unwelcome moniker of the most unpopular Prime Minister in recent history.
There will now be big questions around the stability of Liz Truss’ position.
Chancellor Hunt’s sweeping dismissal of his predecessor’s mini-budget should allow the Bank of England to raise interest rates less aggressively, experts say.
But uncertainty over Liz Truss’s future, following the ditching of much of her economic plan, will continue to create volatility in the markets.
So warns Richard Carter, head of fixed interest research at Quilter Cheviot, who explains:
“Jeremy Hunt has achieved the first step in returning some semblance of credibility to the government’s economic reputation as the bond markets have welcomed his announcement.
It is quite remarkable that it took an almost complete scrapping of the mini-budget announced just over three weeks ago. However, that credibility is still incredibly fragile and much of the government’s next moves will depend on the OBR forecasts being produced at the end of this month.
They won’t make for pretty reading but following this announcement should give investors some confidence that the UK’s finances are on a more stable footing.
Business journalist Declan Curry points out that Jeremy Hunt hasn’t merely u-turned on the planned 1p cut to the basic rate of income tax – he’s ditched the reduction from 20p to 19p altogether.
The London stock market has rallied higher as City traders react to chancellor Hunt’s announcement.
The blue-chip FTSE 100 index now up 0.75% or 51 points at 6909, while the more domestically-focused FTSE 250 has jumped 1.3%.
Housebuilders shares have now jumped by around 4%, on relief that the cut in stamp duty is not being scrapped (this means no tax to be paid on properties up to the value of £250,000)
Jeremy Hunt is bringing back an orthodox approach to tax and spending, which should reassure financial markets, says Dermot O’Leary, chief economist at investment bank Goodbody.
“The Chancellor’s emergency statement should help restore some much-needed market confidence after an extraordinary fortnight of volatility. These measures were designed to get ahead of any further market turbulence today and reassert the Government’s credentials for economic competence and fiscal responsibility.
They will go some way towards reassuring the markets which already, it seems, have faith in Jeremy Hunt as a safe pair of hands at the Treasury. Already we saw the pound strengthen and stocks rise at the start of today as the markets anticipated further fiscal policy U-turns to make the Government’s sums add up.
“This announcement doesn’t resolve the problems facing the UK, not least the political fallout which will be significant for the Prime Minister and the Government.
However, what Jeremy Hunt has achieved, only a few days into the job, is reframing the economic debate around a more orthodox approach to tax and spend, which will in turn increase confidence that debt can be managed sustainably over coming years.
After the last few weeks of political upheaval and economic uncertainty, being back on firm footing grounded in economic fundamentals will be welcomed by investors.”
https://www.theguardian.com/business/live/2022/oct/17/pound-jeremy-hunt-tax-spending-bond-yields-bank-of-england-business-live Pound, shares and UK government bonds rally after most mini-budget tax cuts ditched – business live | Business