By Catherine McBride – 8 minute read
THE CHANCELLOR’S mini-budget was both encouraging and disappointing.
First, the good news.
The Chancellor announced most of the things that Liz Truss had promised to do during her election campaign. This is a welcome surprise, for many years now despite having voted for Conservative Governments – smaller government and lower taxes, we seem to get only more government intervention, more taxes and more stifling bureaucracy.
Removing tax on employment – National Insurance – and not increasing corporate taxes when the economy is close to a recession, are exceptionally sensible decisions. As was the Bank of England’s decision not to mimic the US Federal Reserve and increase UK base rates by 50 basis points. Of course, this has lowered sterling relative to the US Dollar, but we do have a floating currency. That is how it works.
Keeping UK interest rates relatively low will help our struggling businesses and consumers who, unlike those in the US, already have high energy bills to pay. Truss’s tax changes won’t kick in until next April. So, UK interest rates are probably positioned at that Goldilocks level at least for the winter – high enough to tighten money, but not so high that they crush small businesses and consumer spending.
The Bank of England can revisit interest rate policy if gas prices fall back to their pre-Covid levels of under 80p per therm. They are presently over three times this price at 240p per therm, although well off their highs of around 650p in August.
The benefits of a cheaper currency
Although the Chancellor’s proposals will mean a larger borrowing requirement, borrowing to create a stronger economy is a good thing. Printing money to buy everyone a pizza during the Covid pandemic was not. Cleverly, Liz Truss is borrowing to restructure the UK economy, and it will help if our currency is lower.
A lower currency:
- makes imports more expensive, encouraging consumers to buy domestically-produced goods;
- boosts our exports – especially to the US – and this includes service industries;
- attracts foreign direct investment, especially into developing our oil and gas reserves;
- will help industries re-shore production that has been moved to countries with cheaper currencies.
Supply side reforms in the energy market
The Government is providing £40 billion to help with energy market liquidity, issuing 100 new oil and gas licences in the North Sea, reducing the barriers to the development of vital infrastructure as well as ending the moratorium on fracking. This is the type of supply side economic reform we have been waiting to see.
They are also increasing the number of wind turbines; but last month wind provided 24% of UK electricity demand while gas provided 51.3%. Yesterday the statistics were the reverse. Today wind is providing only 8.7% of electric demand while gas is providing 62.8%. More wind turbines will not solve the problem of inconsistent wind. Although the Government is changing the way electricity is priced, by disconnecting it from the marginal cost of gas production, so that the wholesale price better reflects when the Grid is buying renewable energy.
So, what is the bad news?
I believe the Chancellor managed to miss some easy wins to help the UK out of recession.
Delayed tax cuts
Although lower National Insurance (NI) and taxes are good, as are the reversal of the IR35 rules for self-employed people and the increase in entrepreneurs’ allowances, they are not happening soon enough. The NI reversal starts in November, and the tax cuts and non-increases don’t take effect until the next financial year, in April 2023. But UK consumers, the self-employed and small businesses need help now. The delayed start might even encourage people to postpone investments or defer taking profits.
The Chancellor also failed to remove the windfall tax on oil and gas companies. This is hard to understand. We desperately need more oil and gas and secure supplies at lower prices, but we are taxing UK oil and gas companies at 65% if they sell their vital commodities to us from UK oil and gas fields. However, if we import oil and gas from companies headquartered in foreign countries, there is no windfall tax. This is incomprehensible. Meanwhile oil and gas prices have plummeted. So, the windfall profits have become more like gentle breeze profits, yet there is no change in the tax policy.
Energy pricing and levies
Another near miss was the Government’s plan to subsidise energy costs for consumers and businesses as well as to ‘cover’ the £150 environmental levy on domestic energy bills for two years by pretending to pay what is effectively a tax with taxpayers’ own money.
Price caps but not quantity caps
Rather incredibly the government has decided to subsidise everyone’s electricity by capping the price they pay but not the amount they can use. That means taxpayers have two unknown variables in their ‘how much will this cost?’ equation: the differential between the market price of electricity and the cap price; and the amount of capped energy people will use.
At the moment, global gas prices are falling due to mild weather, full storage facilities in Europe and global recession fears. But when the weather turns colder, if the wind doesn’t blow, then energy prices could spike again. Taxpayers will be powerless over the cost of the cap, but one hopes not also actually without power. However, with prices capped thus no incentive to limit domestic electricity use, then there could be problems.
If there isn’t enough electricity to go around, shouldn’t we be saving it for businesses and industry? A much better solution would have been to cap only a fixed amount of domestic energy consumption for each household, and let consumers pay the market price if they use more energy.
Although the government is capping consumer energy costs for two years, they are only capping energy costs for businesses for six months. Businesses need the certainty of capped prices as much or more than consumers, so why the different treatment?
Removing Stamp Duty is also a great idea, but by only cutting it for cheaper houses and first-time buyers, demand will increase in a sector of the market where the UK has limited supply. This excess demand will be exacerbated by owners of affordable homes being unwilling to sell, even if their space requirements have changed, because of the massive step up to 5% Stamp Duty on larger (and thus more expensive) properties. If they live in London, that massive step is more likely to be 10%. More importantly, Stamp Duty cuts into people’s deposit money so they have to borrow more, giving them a higher loan to value ratio. This makes the whole housing market less stable.
Abolishing Stamp Duty completely or reducing it to its former level of 1%, which could be justified for the benefits of registered property ownership, would revitalise the entire housing market and all of the trades that benefit from the sale and refurbishment of housing in the UK. Not just solicitors and mortgage brokers, but removal companies, furniture companies, painters and decorators, builders, curtain makers etc. If more people moved house, the economy as a whole would get a real boost.
High Stamp Duty has simply made having children prohibitively expensive for people living and working in London.
Don’t overtax the rich
I am delighted that the government has removed the cap on bankers’ bonuses as well as removing the 45% rate of income tax. Other financial centres have much lower taxes: someone earning $170,000 (£153,000) has federal income tax rate of 32% in the US while the top rate of federal income tax in the US is only 37% on income over $539,900 (£486,000). In Singapore someone earning over £150,000 (S$240,000) pays 19.5% – although Singapore has many different tax levels. In 2024, they are introducing a top rate of 24% on earning over S$1 million, with just under 20% paid on earning below S$1million (£624,000).
Attracting more high-earning bankers away from New York and Singapore and back to London is important, because the top 1% of earners in the UK pay 28% of our income taxes while costing us little to nothing. Bankers mostly send their children to private schools and use private doctors and hospitals. Attracting more high earners to Britain might help balance the books and would send a powerful signal that Britain is once again fully open for business.
However, there are costs which discourage wealthy people from setting up home in London. Most noticeably, the high cost of housing in Central London, made even higher by Stamp Duty. Most foreign bankers need to live in Central London but if they own a property in their home country, they will be paying 15% Stamp Duty on top of the price of the house.
For example, a successful banker who may want to buy a £5 million terraced house in Kensington would have to pay £525,000 in Stamp Duty alone. If they want a bigger house costing £10 million, then they would have to pay £1,275,000 in Stamp Duty.
Bankers can move just as easily as financial transactions in our digital world. It is worth noting that there is only a 1% tax on property purchases over $1million in New York City – the main financial centre rival to London. A banker would have to work in London for their entire career before the 5% cut in tax on their salary over £150,000 became even close to the amount they would pay in Stamp Duty to buy a house in Central London. So unless this changes, Bankers will probably stay in New York and zoom in when required, with or without the removal of the 45% tax rate
There are lots of good things in the Chancellor’s Speech, but as the reduction in NI only starts in November and the tax cuts start next spring, the most immediate help is energy caps starting in October although the UK gas price was back to 240p per therm when this mini-budget was announced. This is almost a third of the price when the media was screaming that the average energy bills would be over £5000 by January 2023.
If the government wants to alleviate the financial burdens on taxpayers going into a winter of inflated prices, high energy costs and increasing interest rates, then eliminating VAT on essential goods and services – including energy – would have bought immediate relief to everyone. The energy price cap is fine as far as it goes, but for many people, especially those on low and fixed incomes, the cost of energy is still an enormous amount of money.
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Catherine McBride is an economist who writes about Trade and agriculture. She is on the Government’s Trade and Agriculture Commission and is a fellow of the Centre for Brexit Policy.