Deputy First Minister John Swinney and his counterparts from other devolved governments are seeking an urgent meeting with Chancellor of the Exchequer Kwasi Kwarteng to discuss immediate actions needed to reverse the damaging effects of the UK Government’s tax proposals.
Mr Swinney and the Finance Ministers from Wales and Northern Ireland are highlighting the profound impact of “the largest set of unfunded tax cuts for the rich in over 50 years” warning that it is “a huge gamble on public finances and the health of our economy”.
In a joint letter to Mr Kwarteng, they warn against being condemned to another decade of austerity and express deep concern over reports that UK Government departments will be asked to make spending cuts to balance the budget, which may have profound consequences for devolved budget settlements already eroded by inflation.
The Ministers also renew calls for the UK Government to provide targeted support for households and businesses, funded through a windfall tax on the energy sector. In addition, they call for Social Security benefits to be increased, and request additional resources for the devolved governments to protect public services and to fund public sector pay settlements.
FRIDAY’S ‘fiscal event’ contained some of the most substantial tax policy changes seen in recent decades (writes Fraser of Allander’s DAVID EISER). Combined with last week’s announcements on the Energy Price Guarantee and Energy Bill Relief Scheme, this constitutes a huge change in the fiscal outlook.
In this context, the decision not to involve the Office for Budget Responsibility (OBR) is irresponsible. It might be billed as a ‘Growth Plan’, but today’s announcements are a budget in all but name. The OBR plays an essential role in scrutinising tax and spend forecasts, assessing the likely impact of policy announcements on growth, the deficit and debt. Its exclusion from the process weakens transparency around the impacts of the proposals.
The new Chancellor (above) used the first part of his speech to reiterate the government’s unavoidably large interventions in the energy market to protect households and businesses from energy price rises. In the remainder of the speech he announced a host of measures designed to stimulate economic growth through a combination of tax cuts and regulatory changes.
Tax changes – implications in Scotland
There were two ‘tax cuts’ that are more accurately described as reversals in recent or planned increases.
A planned increase in the Corporation Tax rate from 19% to 25% will now not go ahead. The Treasury estimates this will cost £12bn in reduced revenue compared to its previous plans in 2023/24, and more in subsequent years.
The Health and Social Care Levy has also been scrapped, together with the 1.25% increase in dividend tax rates. These changes will cost almost £18bn in reduced revenues in 2023/24 compared to previous plans.
Both of these changes had been pre-announced and apply UK-wide.
The big surprises came on income tax. Here the government announced the biggest reforms (at UK level) since 2009.
The basic rate will be reduced from 20p to 19p one year earlier than expected, applying from April 2023 rather than April 2024.
The 45p additional rate will be abolished in April 2023.
Income tax changes and implications for Scotland
Of course, with income tax being devolved, neither of the changes will apply in Scotland. Instead, the Scottish Government will see a smaller reduction in its block grant next year than it was expecting, boosting the resources available to it in 2023/24 (the reduction to the Scottish Government’s block grant is broadly designed to reflect what the UK government would have raised from income tax in Scotland if income tax had not been devolved, and if the UK government income tax policy had continued to apply in Scotland).
In the context of this additional resource through its block grant, the Scottish Government will then need to decide whether and how to respond through its own tax policy.
It could of course keep Scottish tax policy unchanged. This would enable it to use its additional block grant to invest in public services in Scotland. The cost of it doing this politically would be that the gap between Scottish and rUK tax policy would widen substantially. Almost all Scottish income taxpayers would pay more income tax than they would in rUK. A Scottish taxpayer with an income of £29,000 would face liabilities around £160 higher. A Scottish taxpayer with an income of £50,000 would face liabilities almost £2,000 higher (Chart 1, black line).
Chart 1: Potential difference in income tax liability between Scotland and rUK, in 2023/24
Alternatively the Scottish government could mirror UK tax cuts with tax cuts of its own. It could for example decide to reduce the starter, basic and intermediate rates by 1p. This would broadly retain the difference in tax liability for individuals between Scotland and rUK at current levels (Chart 1, grey line). It would allow the Scottish Government to retain its treasured mantra that ‘the lowest income half of Scottish taxpayers pay less tax than they would in rUK’. But such a policy would cost the Scottish government around £400m in foregone revenues.
Other policy decisions are possible. The Scottish government could decide to cut just the starter and basic rates in Scotland, rather than the intermediate rate as well, at a revenue cost of around £250m.
How the Scottish Government responds to the UK Government’s abolition of the Additional Rate will also be interesting. The Scottish Fiscal Commission is likely to forecast that abolition of the Additional Rate wouldn’t be extremely costly in revenue terms (there are expected to be around 22,000 Additional Rate taxpayers in Scotland in 2023/24 so charging them a few pence less tax on their income above £150k might not have a significant affect in aggregate, particularly if it is assumed, as the SFC will, that the tax reduction will induce some element of a positive behavioural response).
The Additional Rate policy therefore puts the Scottish Government in a difficult political position. If it retains the Additional Rate it will be accused of undermining the ‘competitiveness’ of the Scottish economy, for little direct revenue gain (without any changes to existing policy, a taxpayer with an income of £200,000 would face an additional £5,900 in income tax liabilities in Scotland compared to an equivalent taxpayer in England).
But abolition of the Additional Rate would provide a significant tax cut for the highest income 0.5% of the Scottish adult population (an individual with income of £200,000 would be better off to the tune of £2,500 if the Additional Rate is abolished). The regressivity of a cut to the top rate in Scotland is difficult to reconcile with the Scottish Government’s aspirations for progressivity.
Stamp Duty changes and implications for Scotland
The Chancellor also announced changes to Stamp Duty in England and NI, amounting to an increase in the threshold at which Stamp Duty applies to residential transactions.
As with income tax, these changes will not apply in Scotland. As with income tax, the changes to English policy will pose dilemmas for the Scottish Government when considering its policy on the Land and Buildings Transaction Tax.
The Scottish Government has until now set LBTT in such a way that homes sold in Scotland for less than around £335,000 pay less tax than an equivalent property in England. Above this price, transactions in Scotland face noticeably higher tax liabilities. The changes announced by the UK government today mean that – if there are no changes to the existing Scottish LBTT rates – all property transactions in Scotland would face higher tax liabilities than they would in England (see Chart 2).
The Stamp Duty cuts in England will generate some additional resources for the Scottish Government via its block grant. In ballpark terms the increase in resource might be around £80m. It could use this additional resource to fund public services, or to cut LBTT rates in order to maintain existing tax differentials.
Chart 2: Residential property transactions tax liabilities in Scotland and England
Investment zones – an option for Scotland but at what cost?
The UK government announced the establishment of several dozen ‘investment zones’. It is hoped that these zones will ‘drive growth and unlock housing… by lowering taxes and liberalising planning frameworks’.
Policies implemented within the investment zones will include business rate reliefs for newly occupied or expanded premises, and stamp duty relief on land bought for commercial purposes, and a zero-rate of employer National Insurance Contributions for new employees earning below £50,270.
The hoped-for impacts of these investment zones on UK-wide economic activity – as opposed to their effect on displacing economic activity within parts of the UK – is based more on hope than on empirical evidence.
Several dozen potential zones have been identified in England. The UK government says that it will work with the Scottish government and local authorities to identify zones in Scotland.
What is not yet clear is how the costs of investment zones in Scotland – in the form of reliefs on business rates and stamp duty (which are devolved) and NICs reliefs (which are not devolved) – will be distributed between the Scottish and UK governments. The Treasury’s costing document does not seem to give an indication of the funding associated with the planned investment zones in England, so it is difficult to get a sense of the fiscal scale of these interventions at this stage.
U-turn on IR35
In another regulatory reform design to unlock growth, the chancellor announced the repeal of the anti-avoidance legislation commonly known as IR35. This legislation was designed to reduce so-called “disguised employment”, whereby workers could work long-term for businesses as self-employed contractors rather than employees – and in so-doing reduce the tax liabilities faced by both themselves and the company that they were contracted to.
The IR35 regulations were introduced for public authorities in 2017, and for medium and large enterprises in 2021. The regulation has big impacts on the nature and shape of the workforce in particular sectors.
The introduction of IR35 has been a huge undertaking by public authorities and corporations to ensure compliance with the legislation, so the change announced today is a big deal. It is a shame that we don’t have the view of the OBR of the impact this could have on Income Tax and National Insurance Contributions: but the costing published today by the Treasury suggests it could cut tax receipts by £1.1 billion in 2023-24, rising to £2 billion by 2026-27.
The Energy profits levy – the existing windfall tax
Interestingly, although the Prime Minister has made it clear that additional windfall taxes were not going to be introduced on oil and gas companies, we need to remember that the Energy Profits Levy announced in May is still in place.
This is a 25% additional surcharge on the extraordinary profits that are being made by the oil and gas companies. When it was announced in May, it was expected that this could raise £5 billion this year, although there was a great deal of uncertainty about this.
Under current plans this levy will remain in place until December 2025, and on the basis of the costings published today, the Government has no plans to end it early. The policy is now forecast to raise £28 billion over the next 4 years (including this year). This is another area of costing that it would be particularly useful to get independent scrutiny from the OBR.
Summary: a gamble on growth with long odds
It is undeniably the case that the UK (and Scottish) economies have been characterised for the last 15 years by very weak growth. This has resulted in stagnation in household incomes and living standards, and constrained the growth of government revenues – with implications for investment in public services.
It makes sense therefore for the government to put the objective to raise economic growth at the centre of its strategy. But setting a 2.5% annual growth target, as the UK government has done, is much easier said than achieved.
The government’s decision to reverse the Health and Social Care Levy and cancel the planned Corporation Tax increases merely take policy back to where it has been in the recent past. It is a return to orthodoxy rather than a break from the norm, and in this sense it is difficult to see that it will make any difference to growth.
The substantial cuts to income tax do represent a bigger change to existing policy. But the hope that these will stimulate the economy is based more on blind faith than on any tangible evidence. There is no evidence internationally that countries with lower tax rates grow more quickly. Historically, UK growth rates were highest when tax rates were higher.
Whether today’s announcements unleash economic growth remains very much to be seen. Strikingly, what there was no mention of today was any plans for additional public sector investment. Despite the government’s rhetoric about reforming the ‘supply-side’ of the economy, there was little mention of the role that the skills and health of the population play in influencing the capacity of the economy to grow.
Whilst the government seems comfortable borrowing an additional £30bn or so a year to fund the tax cuts announced today, and is apparently relaxed about an over-growing burden of national debt, the path set out today will constrain the government’s room for manoeuvre on investment in public services in coming years.
At a time when parts of the public sector are struggling to deal with the legacy of the pandemic and other longstanding challenges, the implied prioritisation of tax cuts over public services investment will prove highly contentious, particularly given the regressivity of the cuts.
Households in the top 10% of the income distribution in Scotland will be better off by around £24 per week on average as a result of the cancellation of the Health and Social Care Levy, whereas those in the middle of the distribution will be only £4 per week.
The hope that the policies announced on Friday will boost growth and hence revenues despite cuts in tax rates is a big gamble with long odds.
Chancellor set to outline his vision for “a new era for Britain” focused on economic growth.
38 local and combined authorities in England in the running to establish new Investment Zones to get their local economies growing.
Kwasi Kwarteng is expected to announce new legislation to speed up the delivery of around 100 major infrastructure projects across the UK.
THE CHANCELLOR will today promise “a new era for Britain” focused on driving economic growth.
Kwasi Kwarteng will announce The Growth Plan – a major package of over 30 measures to tackle high energy bills, drive down inflation and cut taxes to drive growth, while maintaining responsible public finances.
Igniting growth by lowering taxes and cutting regulation is this government’s central mission – it will encourage business investment, drive growth, create jobs, improve living standards for everyone and promote confidence in the UK economy.
Speaking about his priorities in his speech to the House of Commons, the Chancellor of the Exchequer, Kwasi Kwarteng, is expected to say: “Growth is not as high as it needs to be, which has made it harder to pay for public services, requiring taxes to rise.
“This cycle of stagnation has led to the tax burden being forecast to reach the highest levels since the late 1940s.
“We are determined to break that cycle. We need a new approach for a new era focused on growth.
“That is how we will deliver higher wages, greater opportunities and sufficient revenue to fund our public services, now and into the future.
“That is how we will compete successfully with dynamic economies around the world.
“That is how we will turn the vicious cycle of stagnation into a virtuous cycle of growth.
“We will be bold and unashamed in pursuing growth – even where that means taking difficult decisions.
“The work of delivery begins today”.
The Chancellor will announce that the government is in discussion with 38 local and mayoral combined authority areas in England including West Midlands, Tees Valley, Somerset and Hull to set up new Investment Zones in specific sites within their area. These will be hubs for growth and are emblematic of the modern Britain that this government want to create.
Under a brand-new initiative, each Investment Zone will offer generous, targeted and time-limited tax cuts for businesses, backing them to increase productivity and create new jobs. This could encourage investment in new shopping centres, restaurants, apartments and offices – creating thriving new communities.
These areas will also benefit from further liberalised planning rules to release more land for housing and commercial development, and reforms to increase the speed of delivering development.
It will include reforms to environmental regulation and streamlined local and national planning policies, for example removing height restrictions on development, so that Investment Zones can bring forward more development – including housing and commercial sites – at the pace needed to boost growth.
Time-consuming negotiations between councils and developers for each project over affordable housing contributions will be scrapped. This will be replaced with a set percentage of affordable homes, whilst ensuring communities get the infrastructure they want and need.
Investment Zones will only be established with support from local leaders. The government will work closely with areas to develop tailored proposals that support their ambitions and deliver benefits for local residents.
The Government will work in partnership with Devolved Administrations and local partners in Scotland, Wales and Northern Ireland to deliver Investment Zones.
The Chancellor is expected to say: “The time it takes to get consent for nationally significant projects is getting slower, not quicker, while our international competitors forge ahead. We have to end this.
“To support growth right across the country, we need to go further, with targeted action in local areas.
“We will liberalise planning rules in specified agreed sites, releasing land and accelerating development.
“And we will cut taxes, with businesses in designated sites enjoying the benefit of generous tax reliefs”.
The Chancellor will also set out an ambitious package of measures, including new legislation, to accelerate the delivery of around 100 major infrastructure projects across the country. The Growth Plan also sets out the infrastructure projects that the government will prioritise for acceleration, across transport, energy, and digital infrastructure.
In 2021 it took 65 per cent longer to get consent for major infrastructure projects than in 2012, with not a single new nuclear-power station finished since 1995.
The development, consultation and consent for a large road scheme takes an average of 5 to 7 seven years, while some offshore wind farms can take up to 13 years from development to deployment and other projects require 34,000 pages of documentation.
The Norfolk Vanguard wind farm, a 1.8GW-wind farm project located in the off the coast of Norfolk that will power almost 2 million homes, took almost 4 years to go through just the planning stages and faced a legal challenge over the visual impact of the scheme delaying the development consent by a further year.
The Junction 10A of the M20, an international route which is used by large volumes of heavy goods and holiday traffic, took seven and a half years from the review of the preferred scheme to be granted planning permission due to delays in the planning system.
The Chancellor will set out plans to reverse this trend speeding up projects including new roads and railways, by reducing the burden of environmental assessments in the consultation process and reforming habitats and species regulations, driving the UK’s economic growth.
Legislation will be brought forward in the coming months to address barriers to delivery by reducing unnecessary burdens to speed up the delivery of vital infrastructure.
These reforms are part of the government’s effort to accelerate projects vital to securing our energy security, such as 6GW capacity of offshore wind power and support other nationally significant infrastructure such as Hinkley Point C and Sizewell C, A417 Air Balloon and Project Gigabit.
Drop false choice between the environment and the economy, urges CPRE
Commenting on the Chancellor’s mini-Budget, Sarah McMonagle, Acting Director of Campaigns and Policy at CPRE, the countryside charity, said: ‘This government needs to drop the false choice between the environment and the economy and get on with delivering the basic building blocks for thriving rural communities that have been neglected for too long.
“But sadly, the government seems hell bent on repeating the mistakes of the past rather than pursuing the policies rural communities really need in order to thrive.
‘If ministers want to see booming high streets in our market towns then they should be investing in a reliable and comprehensive bus network, not fast tracking road building schemes that have long since been proven not to deliver meaningful economic gains.
‘If ministers want to see more money in people’s pockets they should be delivering a massive programme of genuinely affordable homes not trying to bypass the democratic planning system.
‘If ministers want to keep business costs down, they should be making use of the 250,000 hectares of south facing commercial roofspace across the country to achieve a revolution in cheap domestically generated solar energy, not breaking manifesto commitments by trying to resurrect a fracking industry that will have no meaningful impact on wholesale gas prices.
‘The government’s plan to achieve growth by allowing businesses to trash the environment is a recipe for disaster that will ultimately leave rural communities poorer.’
