November 17th, 2022.
The only chance the conservatives have electorally is if the electorate thinks that the measures are fair and the pain is shared. It is 2 budgets in one, 1 for today’s issues and one for election year 2025.
The Office for Budget Responsibility (OBR) needed to provide a summary of the validity of the Government’s spending and revenue models. To this end, it was important that they were onside with the details of the budget.
I have tried to review the budget with my economist’s hat on rather than as a supporter or non-supporter of the Government.
Jeremy Hunt started off by saying: “Three priorities then today: stability, growth and public services.”
“I start with stability. High inflation is the enemy of stability. It means higher mortgage rates, more expensive food and fuel bills, businesses failing and unemployment rising. It erodes savings, causes industrial unrest, and cuts funding for public services. It hurts the poorest the most and eats away at the trust upon which a strong society is built.
“The Office for Budget Responsibility confirms global factors are the primary cause of current inflation. Most countries are still dealing with the fallout from a once-in-a-century pandemic.”
“The furlough scheme, the vaccine rollout, and the response of the NHS did our country proud – but they all have to be paid for.
“The lasting impact on supply chains has made goods more expensive and fueled inflation. This has been worsened by a Made in Russia energy crisis.
“Richard Hughes and his team at the OBR today lay out starkly the impact of global headwinds on the UK economy and I am enormously grateful to him and his team for their thorough work.”
“The OBR forecast the UK’s inflation rate to be 9.1 per cent this year and 7.4 per cent next year. They confirm that our actions today help inflation to fall sharply from the middle of next year.
“They also judge that the UK, like other countries, is now in recession. Overall this year, the economy is still forecast to grow by 4.2 per cent.
On the OBR forecast, he added that “GDP falls in 2023 by 1.4 per cent, before rising by 1.3 per cent, 2.6 per cent, and 2.7 per cent in the following three years. The OBR says higher energy prices explain the majority of the downward revision in cumulative growth since March.
“They also expect a rise in unemployment from 3.6 per cent today to 4.9 per cent in 2024 before falling to 4.1 per cent.
He went on “On personal taxes: “Asking more from those who have more means that the first difficult decision I take on tax is to reduce the threshold at which the 45p rate becomes payable from £150,000 to £125,140. Those earning £150,000 or more will pay just over £1200 more a year.”
“We are also taking difficult decisions on tax-free allowances. I am maintaining at current levels the income tax personal allowance, higher rate threshold, main national insurance thresholds and the inheritance tax thresholds for a further two years taking us to April 2028. Even after that, we will still have the most generous set of tax-free allowances of any G7 country.”
That means that they will gain the benefit from fiscal drag over the next 6 years. This of course is a hidden tax increase obtained without raising direct tax levels.
He neatly ignored National Insurance (NI) for both employee and employer which is in effect a tax on income.
In sentences that Labour would have been proud of he went on:-
““I have no objection to windfall taxes if they are genuinely about windfall profits caused by unexpected increases in energy prices. But any such tax should be temporary, not deter investment and recognise the cyclical nature of many energy businesses. Taking account of this, I have decided that from January 1st until March 2028 we will increase the Energy Profits Levy from 25 per cent to 35 per cent.”
” The structure of our energy market also creates windfall profits for low-carbon electricity generation so, from January 1st, we have also decided to introduce a new, temporary 45 per cent levy on electricity generators. Together these taxes raise £14bn next year. “
Tucked away in his next comments was this
“ I recognize that efficiency savings alone will not be enough to deliver the services we all need. So because of difficult decisions taken elsewhere today I will increase the NHS budget, in each of the next two years, by an extra £3.3 bn. “
The NHS has become a deity and is also a massive drain on finances, leaking cash like a sieve. No one is brave enough to tackle the main cause for increased cash for the NHS which is waste and inefficiency.
He went on to announce the first State backing for a nuclear power station with the announcement that they will be signing contracts to build a new station at Sizewell.
He commented
““Putin’s weaponisation of international gas prices has helped drive up the cost of our national energy consumption. This year we will be spending an extra £150bn on energy compared to pre-pandemic levels, equivalent to paying for an entire second NHS through our energy bills.”
City AM
And the UK of course won’t be touching its reserves of coal and oil or developing fracking.
The main bullet points are:-
The chancellor says we need to bring down inflation. He says that “high inflation is the enemy” because it leads to higher prices, “higher mortgage rates and businesses failings… and causes industrial unrest and erodes savings.”
He says spending cuts would not be compatible with high-quality public services while tax cuts damage enterprise but he’s tried to be fair; just over half of the £55bn consolidation will come from tax, the rest from spending cuts.
Personal Tax
- The threshold at which the 45p income tax rate becomes payable will be reduced to £125,140, from 150,000. This will equate to £1,200 more tax every year for those affected
- Personal tax allowance thresholds will be frozen to 2028 (previously 2026). Tax bands will stay the same so as wages rise the proportion of earnings paid on tax will increase and more will move to higher tax bands
- The Dividend Allowance will be cut from £2000 to £1000 next year, then £500 from April 2024
- The annual exempt allowance for Capital Gains Tax allowance will cut from £12,300 to £6,000 next year
- Electric vehicles will no longer be exempt from Vehicle Excise Duty from April 2025
Business Tax
- The employers’ NICs threshold will be frozen until 2028 but the employment allowance will be maintained at £5,000
- The VAT threshold will be maintained to 2026
- Further measures to tackle avoidance and evasion will raise more money an additional £2.8bn by 2028
- The R&D tax relief SME deduction will be cut to 85% and the credit rate to 10%. RDEC relief will be raised to 30%. He says they’ll work with industry to decide what further support innovative SMEs will require
Windfall Tax
- From January 1 to March 28 the energy profits levy will be raised to 35%
- There will be a new temporary 45% levy on low-carbon electricity generation
Public services
Public spending will be grown but more slowly than growth in the economy. Overall spending in public services will continue to rise in real terms over the next five years.
Employment and education
- The number of employed is not back to pre-pandemic levels so a thorough review of workforce participation will be concluded early in the new year. Unemployment is forecast to rise to 4.9% from 3.6% today
- Sir Michael Barber is appointed as an advisor to work on implementing a “skills reforms programme”
- In 2023 and 2024 the government will invest an extra £2.3bn pa in schools
Defence
- The defence budget will be maintained at at least 2% of GDP
Climate change
- The COP26 Glasgow Climate Pact will be maintained
Health services
- The NHS budget will be increased in each of the next two years by £3.3bn
- Adult social care will get an additional £1bn next year and £1.7bn the following year in order to help it free up hospital beds
Growth
Hunt says you “cannot borrow your way to growth.”
“Sound money is the rock on which long term prosperity rests – but it is not enough on its own. Our plan is designed to build a high-wage, high-skill economy that leads to long term prosperity”
Energy
- A radical approach is needed to avoid bankrupting the economy and destroying our planet
- Energy independence will ensure we can’t be blackmailed
- The Sizewell C nuclear plant in the southeast of England will go ahead, creating 10,000 jobs and providing low-carbon power for six million homes for 50 years when it starts to generate electricity around 2030
- A further £6bn will be invested in energy efficiency, doubling the annual investment and aiming to reduce volatility and this driver of inflation
Household income and spending
- The National Living Wage will be increased from £9.50 an hour for over-23s to £10.42 from April next year
- Help for energy bills will be extended, but it will be less generous. Millions of households will see their energy bills go up by hundreds of pounds a year from April
- Means-tested benefits, including Universal Credit, and pensions, will rise in line with September’s inflation figure of 10.1% from next April. As a result the government is sticking to its “triple lock” on the state pension
Innovation
- “We need to be better at turning world-class innovation into world-class companies…I want to combine our technology and science brilliance with our formidable financial services to turn Britain into the next Silicon Valley”
- Chief Scientific Adviser Sir Patrick Vallance to lead “new work on how we should change regulation to better support safe and fast introduction of new emerging technologies
- Import tariffs on hundreds of items will be removed
- The R&D spending budget will not be cut, Hunt saying that would be “a profound mistake”. Investment in R&D will be protected and public funding for R&D will be increased to £20bn 2024/5
Infrastructure
- No cuts to capital investment budgets for the next two years
- Large gigabit broadband and rail projects will go ahead funded as promised
- Round two of the leveling up fund will be delivered, at least matching the value of round one
Source MPA
To misquote from Alice in Wonderland “Jam tomorrow, Jam yesterday, but no jam today. The Chancellor in his address came across as sincere, and this helped in keeping the market reaction positive. It remains to be seen if he can keep the nation together as he has hurt everyone, business and the electorate with this budget. Will it work? I don’t know, J. K. Galbraith said that economics is nearly as scientific as Astrology so in this case there are a lot of “what ifs” to beware of.
The misgivings I have are that Rishi Sunak is not trusted by the electorate. There is just something about him that irritates people. He can be unbelievably smug, basking in the knowledge of how clever he is. The success of the recovery project depends on how well he can communicate the plans, and how he can keep people backing him and the “project”. He will also need to let Jeremy Hunt have his head and run the treasury without interference.