Mini Budget: Kwarteng's clean break
Many of the measures announced by Kwasi Kwarteng today had already been all but confirmed by rumour and leak over the last few weeks. These included the reversal in the national insurance contribution increase introduced by Kwarteng’s predecessor, Rishi Sunak, and the cancellation of the planned 6 per cent increase in corporation tax.
Both announcements will no doubt be welcomed by the north west’s business leaders, particularly the national insurance reduction, which will impact positively on both employers and employees.
More surprising, although itself subject to some rumour recently, was the confirmation that the planned 1 per cent reduction in the basic rate of income tax is being brought forward to April 2023. Again, this will be welcomed by many. Whereas the energy price guarantee has alleviated some cost-of-living concerns, upward price pressures are expected to continue for some time yet. So a reduction in income tax will put more money back into consumers’ pockets at a critical time.
The parallel cancellation of the additional rate of income tax of 45% was however much more of a surprise. This is the 5% tax rate that only impacts people with incomes in excess of £150,000. With this measure, together with the removal of the cap on bankers’ salaries, Kwarteng risks being accused of helping the already wealthy. This accusation may be tempered by the 1 penny reduction in the basic rate of income tax, which will positively impact many more people, but it’s a political risk nonetheless.
Other interesting items confirmed today included the simplification of the off-payroll workers regulations (so-called IR35 rules). These have become something of a burden for businesses over the last few years, so the repeal will be welcome, as will the decision to leave the Annual Investment Allowance permanently at £1m. This allowance enables businesses to take full relief for the first £1m of capital expenditure they incur. Kwarteng’s hope here is that this will continue to encourage businesses to invest in new and more efficient technology.
How these tax cuts impact already increasing inflation rates remains to be seen. And that will no doubt be the challenge facing Truss and Kwarteng over the coming months: how to decouple increased spending power that comes with tax cuts from the inflationary pressure this spending power creates.
Overall then, Kwarteng’s first outing as chancellor contains steps that many will see as positive. But anyone who has been paying close attention over the last few years cannot fail to have noticed that, whereas today’s measure do indeed cut existing tax rates, these are to some extent simply reversals of very recent tax hikes. It looks great for the headlines, no doubt with one eye on the upcoming general election. However, there is no escaping the fact that the tax burden on north west businesses and families remains high.
Of course, Truss and Kwarteng have a difficult path to tread, needing to fund cash-hungry public services while delivering vote-winning tax cuts. But today’s mini-budget does look like the beginnings of a return to more Conservative-like fiscal principles, and represents a clean break with Johnson, Sunak and Co.
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