Chancellor Brings Forward Further Medium-Term Fiscal Plan Measures

The Chancellor of The Exchequer Jeremy Hunt has today (Monday 17 October) brought forward a number of measures from 31 October’s Medium-Term Fiscal Plan.

This follows after Jeremy Hunt is announced as Chancellor, as Kwasi Kwarteng is sacked Amid Mini-Budget Chaos last Friday (14th October).

Following conversations with the Prime Minister, the Chancellor has taken these decisions to ensure the UK’s economic stability and to provide confidence in the government’s commitment to fiscal discipline. The Chancellor made clear in his statement that the UK’s public finances must be on a sustainable path into the medium term.

Today’s announcement represents another down payment following the reversal of the corporation tax cut announced on Friday 14 October by the Prime Minister. The Chancellor will publish the government’s fiscal rules alongside an OBR forecast, and further measures, on 31 October.

In his statement the Chancellor announced a reversal of almost all of the tax measures set out in the Growth Plan that have not been legislated for in parliament.

The following tax policies will no longer be taken forward:

• Cutting the basic rate of income tax to 19% from April 2023. While the government aims to proceed with the cut in due course, this will only take place when economic conditions allow for it and a change is affordable. The basic rate of income tax will therefore remain at 20% indefinitely. This is worth around £6 billion a year. 
• Cutting dividends tax by 1.25 percentage points from April 2023. The 1.25 percentage points increase, which took effect in April 2022, will now remain in place. This is valued at around £1 billion a year. 
• Repealing the 2017 and 2021 reforms to the off-payroll working rules (also known as IR35) from April 2023. The reforms will now remain in place. This will cut the cost of the government’s Growth Plan by around £2 billion a year. 
• Introducing a new VAT-free shopping scheme for non-UK visitors to Great Britain. Not proceeding with this scheme is worth around £2 billion a year. 
• Freezing alcohol duty rates from 1 February 2023 for a year. Not proceeding with the freeze is worth approximately £600 million a year. The next steps of the Alcohol Duty Review announced in Growth Plan 2022 will continue as planned. The alcohol duty uprating decision and interactions with the wider reforms to alcohol duties under the Alcohol Duty Review will be considered in due course.

This follows on from the previously announced decisions not to proceed with the Growth Plan proposals to remove the additional rate of income tax and to cancel the planned increase in the corporation tax rate. 

Taken together, these changes are estimated to be worth around £32 billion a year.

The government’s reversal of the National Insurance increase and the Health and Social Care Levy, and the cuts to Stamp Duty Land Tax, will remain benefitting millions of people and businesses. The £1 million Annual Investment Allowance, the Seed Enterprise Investment Scheme and the Company Share Options Plan will also continue to further support business investment.

Energy bills support review

The government has announced unprecedented support within its Growth Plan to protect households and businesses from high energy prices. The Energy Price Guarantee and the Energy Bill Relief Scheme are supporting millions of households and businesses with rising energy costs, and the Chancellor made clear they will continue to do so from now until April next year.

However, looking beyond April, the Prime Minister and the Chancellor have agreed that it would be irresponsible for the government to continue exposing the public finances to unlimited volatility in international gas prices. A Treasury-led review will therefore be launched to consider how to support households and businesses with energy bills after April 2023.

The objective of the review is to design a new approach that will cost the taxpayer significantly less than planned whilst ensuring enough support for those in need. The Chancellor also said in his statement that any support for businesses will be targeted to those most affected, and that the new approach will better incentivise energy efficiency.

The government is prepared to act decisively and at scale to regain the country’s confidence and trust. The Chancellor stated in his speech that there will be more difficult decisions to take on both tax and spending. This means doing what is needed to lower debt in the medium term and to ensure that taxpayers’ money is well spent, putting public finances on a sustainable footing.

In light of this, government departments will be asked to find efficiencies within their budgets. The Chancellor is expected to announce further changes to fiscal policy on 31 October to put the public finances on a sustainable footing.

Statement by the Chancellor of the Exchequer

Monday October 17th at 11am

A central responsibility for any Government is to do what is necessary for economic stability.

This is vital for businesses making long-term investment decisions and for families concerned about their jobs, their mortgages, and the cost of living.

No government can control markets, but every government can give certainty about the sustainability of public finances and that is one of the many factors influencing how markets behave.

And for that reason, although the Prime Minister and I are both committed to cutting corporation tax on Friday she listened to concerns about the mini budget and confirmed we will not proceed with the cut to Corporation Tax announced.

The government has today decided to make further changes to the mini budget.

And to reduce unhelpful speculation about what they are, we have decided to announce these ahead of the Medium-Term Fiscal Plan, which happens in two weeks.

I will give a detailed statement to Parliament and answer questions from Members of Parliament.

But because these decisions are market sensitive, I have agreed with the Speaker the need to give an early, brief summary of the changes which are all designed to provide confidence and stability.

Firstly, we will reverse almost all the tax measures announced in the Growth Plan three weeks ago that have not started Parliamentary legislation.

So whilst we will continue with the abolition of the Health and Social Care Levy and Stamp Duty changes we will no longer be proceeding with:

• The cut to dividend tax rates.
• The reversal of off-payroll working reforms introduced in 2017 and 2021.
• The new VAT-free shopping scheme for non-UK visitors.
• Or the freeze on alcohol duty rates.

Secondly, the government’s current plan is to cut the basic rate of income tax to 19% from April 2023.

[…]

But at a time when markets are rightly demanding commitment to sustainable public finances, it is not right to borrow to fund this tax cut.

So I have decided that the basic rate of income tax will remain at 20% and it will do so indefinitely, until economic circumstances allow for it to be cut.

Taken together with the decision not to cut Corporation Tax, and restoring the top rate of income tax the measures I’ve announced today will raise, every year, around £32bn.

Finally, the biggest single expense in the Growth Plan was the Energy Price Guarantee.

This is a landmark policy supporting millions of people through a difficult winter and today I want to confirm that the support we are providing between now and April next year will not change.

But beyond that, the Prime Minister and I have agreed it would not be responsible to continue exposing public finances to unlimited volatility in international gas prices.

So I am announcing today a Treasury-led review into how we support energy bills beyond April next year.

The objective is to design a new approach that will cost the taxpayer significantly less than planned whilst ensuring enough support for those in need.

Any support for businesses will be targeted to those most affected.

And the new approach will better incentivise energy efficiency.

The most important objective for our country right now is stability.

Governments cannot eliminate volatility in markets, but they can play their part, and we will do so because instability affects the prices of things in shops, the cost of mortgages, and the value of pensions.

There will be more difficult decisions to take on both tax and spending as we deliver our commitment to get debt falling as a share of the economy over the medium term.

All departments will need to redouble their efforts to find savings, and some areas of spending will need to be cut.

But, as I promised at the weekend our priority in making the difficult decisions that lie ahead will always be the most vulnerable.

And I remain extremely confident about the UK’s long term economic prospects as we deliver our mission to go for growth.

But growth requires confidence and stability, and the United Kingdom will always pay its way.

This Government will therefore make whatever tough decisions are necessary to do so.

Thank you.

Sector Response

Ben Harrison, Director of the Work Foundation at Lancaster University, a leading think tank for improving working lives in the UK:

“The Chancellor’s emergency statement confirms that not only has the Government’s gamble with the economy failed, but it has actually made an already serious cost of living crisis worse for millions of people.

“It will be those in low paid, insecure work who will be hardest hit by rising interest rates, recession and public spending cuts.

“Before the doomed mini budget, nearly half of households reported they were struggling to afford their bills, and huge rises to mortgage and loan costs have made workers poorer.

“Looking ahead, it’s vital that cuts to Universal Credit that take money out of the pockets of people on the lowest incomes are avoided.

“And with households and employers struggling in the face of upheaval and uncertainty, the drip feed of partial announcements must stop. We need a comprehensive, costed budget with supporting analysis from the OBR.”

* Data on households struggling to afford their bills is from the ONS Public opinions and social trends, Great Britain: 31 August to 11 September 2022.

Joshua Raymond, Director at online investment platform XTB.com comments:

“We’ve seen the markets react positively to the Chancellors’ statement. The pound has gained against every major currency today including 0.5% against the US dollar and euro. Long dated gilt yields have fallen sharply with the 30yr bond yield dropping by more than 0.4%. The statement provides some much needed clarity ahead of the OBR forecasts due out in two weeks time. 

Perhaps the largest news is the earlier cut off to the energy price cap to April next year. This is a significant development both financially and politically. Financially, the energy price cap is one of the largest contributions to the black hole in the fiscal budget and gives the government more headroom for tighter fiscal cuts especially should a global recession force energy prices lower than expected in the medium term. Politically however it’s devastating for the Liz Truss premiership. It’s a complete reversal on every single major political pledge she has made to date and as a result, her political authority is most likely at an end. In a matter of days, I expect the market focus to shift more towards who replaces Liz Truss as Prime Minister of the UK. Liz Truss today became Prime Minister in name only.”

Paul Whiteman general secretary of school leaders’ union NAHT, said:

“We all now wait to see whether or not the financial statement made this morning brings some certainty and calm to the markets. However, one thing is clear: there was no good news for schools or other public services.

“School leaders will rightly fear the chancellor’s suggestion that further savings will need to be found. We need to be very clear that school budgets are already at – and indeed beyond – breaking point. It would be a disaster if any of the mooted efficiency savings have an impact on school budgets.

“School leaders will also be worried about what any changes to the scheme supporting energy costs could mean for them. We need urgent clarification that the government will continue to support schools beyond the initial six-month period previously announced.

“Schools are already financially stretched to the bone. They have made all the easy savings. All that is left are very hard decisions with big consequences.”

Rebecca McDonald, Chief Economist for the Joseph Rowntree Foundation said: 

“The Chancellor is moving quickly in extraordinarily challenging times to try to bring stability to the markets. Families on low incomes, trying to afford the essentials, pay their rent, and keep food on the table, desperately need that stability too. 

“He could and should confirm today that the government will uprate benefits in line with Wednesday’s inflation figure to ensure that the UK does not face historic levels of hardship on his watch – the polling shows the public agree that this is the right thing to do. 

“The cost of living crisis continues to intensify for many families, who are approaching the winter with an increasing sense of fear. The review on help with energy bills is important but ongoing support must be effectively targeted at those who need it. 

“The country can’t afford another self-inflicted wound so it is crucial that we learn lessons from the past and don’t cut back on the services people need, and which could easily be overwhelmed if hardship increases.  

“This Government surely cannot wish to be remembered for withholding hundreds of pounds from millions of families when the basic rate of benefits is already at its lowest in real terms for 40 years and prices are rocketing. The Chancellor is moving at pace and should confirm that he will also go ahead with uprating benefits as soon as possible.”  

*The poll was of 1600 people across the UK and was carried out online by YouGov during the Conservative Party conference on 4th and 5th October.

IPPR North says:

“Whilst chaos reigns in Westminster, here on the ground in the North and across the country, people are exhausted by financial uncertainty. Soaring mortgage rates, rising rents and the erosion of real wages are everyday worries. Too many are struggling to keep their heads above water. 

“It is no surprise that the government has had to reverse swathes of its ‘mini budget’ announcements today. Borrowing to fund tax cuts for the wealthy is not sustainable, fair or how you grow the economy. 

“Despite the government now going into hard reverse on most of its plans, they’re still not clear on whether they can stick to the basics. Promises like the delivery of Northern Powerhouse Rail in full, and investment in our vital public services must not be rolled back. This would be devastating to communities across the North and totally undermine the UK economy.  

“This is the moment for clarity, stability and shoring up commitments that protect the most vulnerable, across the whole country, whilst the wealthiest should step up – we are yet to see such assurances”. 

The Social Market Foundation’s response to Chancellor Jeremy Hunt’s announcement on 17 October 2022 follows below.

On the economic outlook, James Kirkup, Director of the Social Market Foundation said:

“Cancelling the borrowing-fueled stimulus of the mini-budget should ease some of the pressure on the Bank of England to raise interest rates dramatically to counteract the inflationary effects of Government policy – it is welcome to see the conflict between fiscal and monetary policy being reduced. 

“The central decision to prioritise sustainable public finances over an ideological commitment to tax cuts is also sensible and welcome. Yet stability is a necessary but not sufficient condition of economic success. What is needed now is a genuine plan for growth, focusing on giving Britain a bigger and better-skilled workforce. 

“That means greater efforts to help and encourage parents, older people and the long-term sick back into work. It means making sensible use of international migration to fill gaps in the British labour market. And it means ensuring that schools, colleges, skills and training are properly funded on a long-term basis.”

On the Energy Price Guarantee, Amy Norman, Senior Researcher at the Social Market Foundation, said:

“Amidst the chaos of the last three weeks, it is worth remembering that the purpose of the original mini-budget was to support households with forecasted soaring energy bills. The commitment to keeping this support in place this winter is welcome.

“While the changes to the price guarantee seem reasonable from a public finances perspective, policymakers will need to contend with the practical challenges of designing a ‘targeted and capped’ scheme. The principle of targeting support is hard to disagree with but designing it has inherent moral and practical trade-offs. Who should receive support and who shouldn’t? Is our system set up to find them? And where are the cut-off points? In just five months, Treasury officials will need to ensure that the new scheme avoids disastrous cliff-edges that may create disincentives for households or see those in need miss out on crucial support.

“The Chancellor’s ambition to better target resources and incentivise energy efficiency is the right one but implementing it will be fearsomely difficult from a national insulation mission to advice or price signals. Better efficiency not only benefits household bills but the public finances too. Although at this stage, it remains to be seen just how far this commitment will deliver for either.”

On the turmoil around UK economic policy and its future, Aveek Bhattacharya, SMF Research Director, said:

“The current fiscal mess just highlights how badly wrong things can go if the government and the Bank of England are pulling in separate directions. The Chancellor’s statement today, and the difficult trade-offs the Government is beginning to face up to, could have been avoided if fiscal policy were delegated to an independent expert body as the Social Market Foundation has called for.

Back in 1997, giving the Bank of England the responsibility to set interest rates boosted confidence in the competence and stability of British macroeconomic policy overnight. Taking a similar step, and handing the government budget over to the technocrats might seem drastic, but it could help re-establish credibility, and hopefully avert some of the painful choices ahead.”

On stamp duty and housing, Aveek Bhattacharya, SMF Research Director, said:

“Hardly anybody would argue that stamp duty is a good tax, but the Government’s insistence on protecting stamp duty cuts, even as it seeks ways to restore the public finances, is a sign of misplaced priorities. Ideally, stamp duty should be replaced with a reformed council tax or some alternative ongoing property taxes or wealth tax. Inherited property should also be taxed more highly than earned income.

“Yet persisting with a reduction in stamp duty implies the government is more concerned about protecting unearned property wealth than protecting the most vulnerable from painful cuts to public services and falling living standards.

“A government that is already unpopular and taking difficult decisions should bite the bullet and finally address the harmful imbalance of wealth and opportunity that has been created by decades of loose monetary policy and restrictive planning rules that have madly inflated property prices. Rising house prices are not a sign of success, they’re a symptom of economic problems that sooner or later Britain must solve. Otherwise home-ownership will become a hereditary privilege that is forever denied to many members of Generation Rent.”

TUC General Secretary Frances O’Grady said:

“The Conservatives drove the UK economy over a cliff. Hunt slamming the gears into reverse now won’t help families and businesses already hit by soaring borrowing costs.

“People needed reassurances today. Instead, they got more uncertainty – about energy bills, about our public services, and about whether universal credit and benefits will rise with inflation.

“We are now on the brink of a deep and damaging recession that threatens millions of jobs. But the latest Conservative Chancellor still has the same basic approach that got us into this mess.

“The Chancellor should have announced a boost to universal credit and pensions, and a comprehensive plan to get wages rising faster for everyone. And he should have announced a much higher windfall tax on oil and gas giants.”

On the announcement of a review of support for families and businesses with energy costs beyond April 2023, she added:

“Families and businesses now face months of worry. There is going to be less help with bills – but no-one knows who will lose out, by how much, or whether there will finally be a programme to fix Britain’s cold and draughty homes. This is not the reassurance working families need.”

Neil Carberry, REC CEO said:

“In response to the original mini-Budget, we highlighted the importance of a fiscal plan the markets can believe in. Today’s announcements will hopefully calm the situation and allow space for the key debate – how to help businesses generate the sustainable growth that will keep public services funded and taxes low without overstretching the public finances.

“The most important part of generating growth is the hard work that needs to be done on issues like skills, getting more people into the labour market, and the tax system. There are no quick fixes. As we said last month, it is not enough to tear things down – we need to take time to build. Just as scrapping changes on IR35 did not solve the problem of a complex and poorly enforced system, keeping them will not make these issues go away either. We have had too many employment-related policy decisions drafted from the headline down – it is time to start working from the workplace up, in partnership with employers and employees.

“Ahead of any further interventions by the Chancellor, incentivising business to invest in skills and make it easier to recruit and retain staff should be front of mind. One simple amend would be to finally reform the failed Apprenticeship Levy. The economy has suffered but demand in the UK labour market remains strong. Policies to maintain and increase that strength should be the focus as another mechanism for calming the markets and working towards a more productive, better paid workforce.”

Torsten Bell, Chief Executive of the Resolution Foundation, said:

“The Chancellor has junked Trussonomics in order to reduce the pressure on the Bank of England to raise interest rates, and on the Treasury to cut spending. He hasn’t just reversed 60 per cent of the mini-Budget’s tax cuts, he’s dumped the basic rate cut announced by Rishi Sunak and committed to rolling back support for energy bills next year.

“The speed of this turnaround is stark. This is now very clearly a tax raising parliament, with the tax take set to reach highs not sustained since 1950. The price of shielding the public finances from wholesale gas markets next year is more pressure on households, with the energy price cap now on course to hit £4,000 next April – almost double its effective level today.

“These are tough choices being made by the new Chancellor, that will reduce the scale of public spending cuts set to be announced on 31^st October – even more so if they lead markets to reduce the interest rates they charge government for borrowing.

“But, with tens of billions of spending cuts still to come, and a new energy support package needing to be devised, many of Jeremy Hunt’s tough choices still lie ahead.”

Kevin Courtney, Joint General Secretary of the National Education Union, said:

“Having fully discredited itself in the eyes of the world, this shambolic administration continues.

“Families now face uncertainty about their fuels bills after April. The Mini Budget has increased the cost of mortgages and it will be even harder for families to make ends meet. The rates of child poverty will continue to rise. And for schools, uncertainty grows. There are no guarantees beyond the initial six-month period for the energy support plan. We need urgent clarity in order to plan and prepare.

“The suggestion that further cuts need to be made across departments will alarm school and college leaders. There is already a serious funding crisis due to the sharp rise in energy costs and unfunded pay awards, so the education secretary must do everything in his power to protect funding.

“Our members have told us that there is a willingness to take strike action on pay. Teachers have lost 20% of their pay in real terms since 2010, and for support staff a staggering 27%. This is not a sustainable situation. Teachers and support staff have been made to endure real-terms pay cuts through good economic times and bad. We cannot see this historic cycle continue. If this Government values education, then it must also value educators.”