Extraordinary events in the UK throughout September and October have seen the Government announce a ‘mini-budget’ – the contents of which have now largely been scrapped.
Prime Minister Liz Truss, and her first Chancellor Kwasi Kwarteng, announced a series of tax-cutting measures on 23 September.
The Chancellor in his statement said the changes, which were far from mini in reality, were designed to kick-start the economy and provide ‘supply side’ reforms to help businesses grow and let households keep more of their money.
Kwarteng’s announcements were far ranging and were described as one of the most dramatic shifts in policy from the Government since the infamous 1972 Budget from then Chancellor Anthony Barber.
But markets, the media and politicians reacted extremely poorly to the measures which were posing potentially hundreds of billions of unfunded changes to Government policy.
Despite political opposition to the measures, what really killed the mini-budget was the reaction by the bond market – which ultimately would have been asked to fund the measures through new Government debt issuance.
Where are we now?
Liz Truss was forced to sack her Chancellor Kwasi Kwarteng on 14 October. This is because the Bank of England had implemented a special program to support the bond market and protect certain pension funds from running out of cash.
Bank of England Governor Andrew Bailey set a deadline for the scheme of 14 October. This forced Liz Truss’s hand and triggered a series of reversals which initially saw the Government ditch plans to scrap the 45p income tax band, then reverse plans to hold corporation tax at 19% instead of a planned rise to 25%.
Once Truss sacked her Chancellor Kwasi Kwarteng, Jeremy Hunt – a former leadership candidate and health secretary – was brought in as the new Chancellor to steady the ship of Government.
On 17 October, Chancellor Hunt announced the effective scrapping of all the measures set out in the mini-budget. The only surviving measures were the reversal of the National Insurance hike and the stamp duty cut – as both those measures had already been enacted (more on those below).
But the planned cut in the basic rate of income tax to 19% has been binned. When he was Chancellor, Rishi Sunak promised this change in 2024, but Hunt, keen to reassure markets and return confidence to the Government’s economic policies, has scrapped the tax cut completely.
As for other measures, the alcohol duty cut will no longer go ahead, IR35 freelance tax reforms will take place instead of being scrapped, and the Energy Price Guarantee will no longer run for two years (more on that here).
The retreat and reversal of policies has left major questions over Liz Truss’s leadership. Jeremy Hunt was compelled to go further than simply cancelling the changes because the Government had caused a major confidence loss in markets that effectively were on the hook to pay for the measures.
This comes against a backdrop of tough and volatile market conditions, monetary policy tightening and ongoing high inflation. Together, this makes the mini-budget’s measures extremely unpalatable to investors, even if these measures were designed to promote growth and help households in the UK.
A couple of measures have survived however, and these are detailed below.
National Insurance and dividends
The 1.25% hike in National Insurance payments has been fully scrapped, and this will take effect from 6 November. According to the Government, the average worker can expect to save £330 in NI payments in 2023/24.
Dividend tax will be affected by the cut to National Insurance, effectively taking the rate back to where it was before it was hiked in the first place.
Dividend tax rates will be reduced to 7.5% for basic rate payers, 32.5% for higher rate payers and 38.1% for additional rate payers. All of this will take effect from 6 April 2023.
Stamp Duty
Kwasi Kwarteng also made significant changes to the way in which stamp duty works.
No one will pay stamp duty on a property worth less than £250,000 while the first-time buyer (FTB) threshold has risen from £300,000 to £425,000. The maximum level of FTB relief will also raise from £500,000 to £625,000.
These changes were made effective immediately from 23 September.
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