Mini-Budget, Big tax cuts

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The newly appointed Chancellor of the Exchequer, Kwasi Kwarteng MP, today announced a series of tax cuts which Paul Johnson of the Institute for Fiscal Studies (IFS) described as the “biggest tax cutting fiscal event since 1972”.  

The Chancellor’s announcement was labelled by the UK Government as a “fiscal event” or Growth Plan (others described it as a “mini-budget) rather than a full Budget. Not being a Budget meant no accompanying Office for Budget Responsibility (OBR) forecasts, despite the significant fiscal implications of the announcements, coupled with the 40 year high levels of inflation we have seen in the economy in recent months. Another impact of this not being a “full” Budget, was that we did not see the usual Treasury distributional analysis by household arising from the various announcements.  

With the announcement of £45 billion of tax cuts by 2026-27 and the inclusion of the pre-announced energy cap (one of the largest government interventions in living memory) expected to cost £60 billion this year, there was clearly nothing “mini” about today’s fiscal event.   

What did the Chancellor announce?   

Some of the measures had been trailed in advance, including by the new Prime Minister in the recent Conservative Party leadership election.  

Perhaps the most heavily trailed tax announcement was the reversal of the National Insurance rate increase from earlier this year. Class 1 (payable by employees and employers) and Class 4 (payable on profits by the self-employed) National Insurance Contributions (NICs) will now be reduced by 1.25 percentage points from 6 November, and the introduction of the Health and Social Care Levy as a separate tax from April 2023 will be cancelled.   

The previous Chancellor, Rishi Sunak MP, had stated that revenues raised from the Health and Social Care levy would be “ringfenced” for spending on health and social care. The new Chancellor, however, noted that the previously identified funding for health and social care would be maintained. This means that the associated Barnett consequentials coming to the Scottish budget from this policy will be unaffected.  

The energy cap had already been announced by the Prime Minister on 8 September, but the Chancellor confirmed that the “Energy Price Guarantee” would cap the unit prices that consumers pay for electricity and gas. He claimed this would bring the average household bill to £2,500 for two years from October 2022. There was also confirmation of a temporary 6 month scheme to provide a discount on wholesale gas and electricity prices for businesses and other non-domestic users, including charities and public sector organisations.  

The previous Chancellor’s plan to increase Corporation tax rates to 25% from next April were also abolished, and instead will remain at 19%. This is estimated to reduce Corporation tax revenues (compared with what would have been collected had the increase gone ahead) by £12 billion next year and nearly £19 billion in 2026-27.   

Stamp Duty (the tax paid on property transactions) changes had been rumoured in recent days, and the Chancellor confirmed that the threshold above which Stamp Duty is paid in England and Northern Ireland would double to £250,000, and thresholds for first time buyers would also rise to £425,000. Stamp duty does not apply in Scotland (where the equivalent tax is Land and Buildings Transactions Tax), so this does not directly affect individuals in Scotland. However, there are budgetary implications from this policy for Scotland, which are discussed below.  

Less heavily trailed, and arguably the most surprising announcement today was in the area of income tax. The Chancellor announced a cut from April 2023 in the basic rate of income tax to 19p and the abolition of the highest 45p rate of income tax paid by individuals earning over £150,000.  Again, these changes do not directly affect Scottish taxpayers, as income tax rates and thresholds for Scotland are set by the Scottish Government.  However, again there will be indirect effects and the implications of this for the Scottish budget are covered below.   

Other announcements included:  

  • The government to cover for two years the environmental and social costs, including green levies, currently included in energy bills 
  • The abolition of the cap on bonuses for bankers 
  • An intention to “work with the devolved administrations and local partners” on introducing Investment Zones to “drive growth and unlock housing” through “tax incentives, planning liberalisaton, and wider support for the local economy.” 
  • Increasing the administrative earnings threshold for those on universal credit to 15 hours a week at National living wage for an individual claimant (and 24 hours per week for couples) from January 2023.  

What does this mean for Scotland?  

The announcements today on reversing the National Insurance increase from earlier this year, and not going ahead with the planned Corporation tax increases in April are in tax powers held by the UK Parliament, and paid by individuals and businesses in all nations and regions of the UK. These changes, therefore, will directly affect Scottish taxpayers and businesses. 

It was also confirmed that these and the other measures announced today will be funded from UK Government borrowing. However, borrowing is not “free money” and will be added to the UK debt stocks to be repaid in the future. The increasing debt levels projected to come from these and the other interventions announced today are happening at a time when interest rates on borrowing are rising due to higher inflation. As such, there could be indirect impacts on Scotland in the future via tax increases, public spending reductions feeding through to the Budget via the Barnett formula, or a combination of the two. At some point action may be necessary to service the large debts undertaken, although this will be mitigated somewhat if the government’s economic growth goals materialise.  

There were, however, also announcements on taxes which are devolved to the Scottish Parliament and will have a material impact on the size of the Scottish budget.  

On income tax, both the measures on the basic rate reduction and the abolition of the top 45p rate in and of themselves increase the size of the Scottish budget. 

This is due to both measures resulting in reduced rest of UK (rUK) revenues.  The Scottish budget is reduced by an amount based on what would have been raised in Scotland under rUK income tax policy.  So, lower rUK income tax revenues result in a smaller block grant adjustment taken from the Scottish budget, boosting the money available. It will be for the Scottish Government to decide whether or not to pass on some or all of this additional resource to income tax payers in Scotland via some kind of equivalent tax cut.  

There were also tax cuts announced to Stamp duty in England and Northern Ireland – a tax power devolved to the Scottish Parliament (and Welsh Parliament). As with income tax, this will impact the Scottish budget through a reduced block grant adjustment for the Scottish equivalent Land and Buildings Transaction Tax (LBTT). A reduced block grant adjustment for LBTT increases the Scottish budget, and again gives the Scottish Government a decision to make on whether to pass on that extra money via an equivalent cut to Scottish LBTT payers, or use the additional resource for public spending. 

A preview of coming fiscal events in Scotland 

There will be no shortage of Scottish fiscal action in the coming weeks and months. 

The Scottish Government has committed to publishing the outcome of its Emergency Budget Review within two weeks of today’s mini-budget. This process is already underway within Government, and is focusing on savings to be made in the current financial year (2022-23) to fund “cost crisis” interventions and improved pay deals for public sector workers.  

Indeed, the Deputy First Minister has already set out initial savings of £560 million in a letter to the Finance and Public Administration Committee on 7 September. We can expect the outcome of the Emergency Budget review to be published prior to October recess, as well as the formal Scottish Statutory Instrument (SSI) for making these in-year changes, the Autumn Budget Revision. This secondary legislation is scrutinised by the Scottish Parliament’s Finance and Public Administration Committee. 

There will then be a full Scottish Budget for the next financial and tax year (2023-24) published later this year, likely in December, and possibly following a full UK Budget in the autumn.  

Ross Burnside, Senior Researcher, Financial Scrutiny Unit, SPICe