The mini-budget 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. It seems incredible to proclaim this as a victory, but for many years now Conservative voters have been bitterly disappointed that having voted for smaller government, less intervention and lower taxes, they seem to get only more government, more intervention, more taxes and more stifling bureaucracy. So three cheers for Liz Truss and her Chancellor, for simply doing what they said they would.
This is almost revolutionary in today’s politics, on all sides of the House. Just remind yourselves of the fuss the Opposition made about the National Insurance rise in March, and now listen to the hullabaloo they are making about the removal of the same tax they opposed less than six months ago.
Removing tax on employment – National Insurance – and not increasing corporate taxes when the economy is (according to the Bank of England) already in 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. Let’s hope the mainstream media don’t bounce the Bank into reversing this decision (although they are having a jolly good try). 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. Even with the present price cap, energy bills are having a dampening effect. 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 248p 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 rebuild 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 on-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 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.
So what is the bad news?
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 oil and gas companies at 65% if they sell their vital commodities to us – at least if they sell it 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. They are still well above 2019 levels, but well below their summer highs. So the windfall profits have become more like gentle breeze profits, yet there is no change in the tax policy. Just as companies should not be encouraged to keep their profits and let taxpayers pick up their losses, governments should not snatch corporate profits but let businesses keep their losses. This is an especially acute issue for companies dealing with commodities, where returns can be volatile.
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, 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.
Stamp Duty is a sunk cost. You never get it back, unlike the price of the house which you can recoup when you sell. The only way an owner can get their Stamp Duty back is by selling the house for 5% or 10% more than they paid for it – this creates a built-in expectation of house price inflation, distorting the market. But the profit will have already been totally absorbed by the Government upfront, while the house buyer takes all the risk. There is no refund of your Stamp Duty if you sell at a loss.
Last year, Stamp Duty Land Tax (including the tax on enveloped dwellings) raised £18.6 billion, about 0.8% of GDP and only 2.6% of total revenue – and this is by far the highest amount ever raised from this short-sighted tax. What is the point of removing Stamp Duty only for the cheapest houses and increasing demand in an already overcrowded sector? Why not dump the tax entirely and do whatever is possible to make raising a family in the UK as cheap as possible?
The housing ladder is not so much a ladder as an arched climbing frame. And we need to keep people moving. First time buyers can’t get on to the climbing frame if the people ahead of them can’t afford to move on. And this includes getting empty nesters to climb down the other side of the frame.
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.
If the Government really wants to keep this relic from the politics of envy days, then they could retain the tax on enveloped buildings, which mainly hits foreign billionaires. High Stamp Duty has simply made having children while living and working in London prohibitively expensive.
Energy pricing and levies
Another near miss was the Government’s plan to subsidise energy costs for consumers and businesses. They blame the UK’s high energy costs on global events without acknowledging their own and previous governments’ ill-considered policies which bet the house on intermittent wind technology, or worse on solar power, in a country whose most southern point is 50 degrees north of the equator. These flawed policy choices are the main cause of our energy crisis. How fitting that the Chancellor’s speech was delivered on the equinox – at the point where the days become shorter and solar power is only available when nobody needs it.
In fairness to the Government, it is lifting the ban on fracking and reducing the barriers to the development of vital infrastructure, and will ‘cover’ the £150 environmental levy on domestic energy bills for two years. It would have been far preferable to abolish this levy rather than pretend that government is paying what is effectively a tax with taxpayers’ own money. But they are also going to change 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. They are also going to cap energy costs for businesses for six months, although details of how this will work have yet to be published. But as businesses need the certainty of capped prices more than consumers, why not cap business unit energy costs for two years as well?
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. 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.
The other unknown variable in calculating the cost of the energy cap is the differential between the market price of energy and the cap. At the moment, global gas prices are falling, as is the oil price and the coal price. This is 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 this, but one hopes not also actually without power. However, with prices capped and no incentive to limit domestic electricity, then there could be problems. Pray for a windy winter. But not for gales, as this also causes the wind turbines to be shut down.
The other thing that beggars belief is the claim on page 10 of the full publication of the Chancellor’s statement that the government’s energy support will lower inflation by 5% this winter. Five per cent, 5%, now where have we heard that number before? Oh yes, that is the VAT that the Government adds to domestic energy bills while adding 20% VAT to the energy bills of business users – and this is a VAT charge that is not refundable so is added on to the sales price of finished goods. Surely removing VAT from energy bills would bring them into line with other zero rated utilities and lower not just household bills but also the cost of UK manufactured products across the board.
Stop taxing the rich
I am delighted that the government has removed the cap on bankers’ bonuses, which was always a silly idea. Banks used to employ their staff on relatively low fixed wages but incentivise them with the potential of earning large bonuses on profitable results. Unprofitable results usually made the bankers responsible unemployed.
Capping bonuses just forced banks to increase the salaries of their successful employees and made it much more expensive to fire their unsuccessful ones. The EU, which introduced this regulation, thought that a bonus cap would stop bankers taking risks. But it was the governments which saved banks and investment firms from bankruptcy who taught them that they could become ‘too big to be allowed to fail’. So total market exposures that were measured myopically by management when investment firms were partnerships and Building Societies were mutuals, became a risk for taxpayers instead. Capping bonuses didn’t change this in the slightest.
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. Can anyone else see why bankers are no longer moving 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. As most bankers are likely to be transferred to another international branch after 5 years, this massive payment would never be recouped. So unless this changes, they will probably stay in New York and zoom in when required, with or without the bonus cap.
There are lots of good things in the Chancellor’s Speech, but as the tax cuts only start next spring, little will really help people now. If the government wanted excellent headlines without losing a lot of revenue, then scrapping Inheritance Tax, Stamp Duty and the higher rate of income tax would have done this while reducing revenues only by about £25 billion (out of a total of £713 billion).
But 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.