The latest UK fiscal event - taking back control?

On 17 October, the recently appointed Chancellor Jeremy Hunt announced significant changes to the measures announced by his predecessor in the 'mini budget' on 23 September. In light of market events, the decision was taken to bring these announcements forward ahead of the Medium-Term Fiscal Plan which will be released on 31 October, alongside full Office for Budget Responsibility analysis.

The Chancellor confirmed that the following measures will now not be taken forward:

• Cutting the basic rate of income tax to 19% from April 2023 – whilst the government aspires to cutting the rate in due course, this will only take place when economic conditions allow for it (so the prior commitment to cut from April 2024 would seem also no longer to apply).
• Cutting dividend tax rates by 1.25% from April 2023 – the increases to rates introduced from April 2022 will be retained.
• Repeal of the 2017 public sector and 2021 private sector reforms to the off-payroll working rules (the so-called IR35 rules) – this change will mean that end clients will remain responsible for determining the employment status of workers providing their services through intermediaries, and accounting for PAYE and national insurance contributions where required.
• The introduction of a new VAT-free shopping scheme for non-UK visitors to Great Britain.
• The freezing of alcohol duties from 1 February 2023 for a year, although the next steps of the Alcohol Duty Review announced in the Growth Plan 2022 will continue.

These announcements supplement the 'down-payments' made through previous decisions not to proceed with the abolition of the additional rate of income tax and the cancellation of planned increases to corporation tax. Taken together, these changes are estimated to be worth £32 billion a year by 2026/27.

The measures announced on 23 September to reverse national insurance increases and to abolish the health and social care levy, and to cut stamp duty land tax, will remain. The permanent £1m Annual Investment Allowance and changes to the Seed Enterprise Investment Scheme and the Company Share Options Plan will also be retained, to support business investment.

Alongside taxing measures, the Chancellor also announced a review of the Energy Price Guarantee and the Energy Bill Relief Scheme – these will continue until April 2023 in the form announced, but a Treasury-led review is being launched to consider how best to support households and businesses from that date.

Attentions will now turn to the detail of the announcements in the Medium-Term Fiscal Plan – it is expected that there will be 'more to come' with further changes to fiscal policy being announced on 31 October to put the public finances on a sustainable footing. It is clear that growth has now pivoted to stability, but the concern remains that a further shift towards austerity will be announced in two weeks' time.

Financial market response

Financial markets, particularly UK gilts, received the Chancellor's announcement well although had made their modest gains in the hours before the announcement itself, effectively anticipating his pivot away from unfunded tax cuts.

But the gains still leave some way to go if markets are to regain ground lost since the 'fiscal event' on 23 September. That gap reflects the fiscal gap still to be closed if projections for the UK's public finances are themselves to close the gap to the OBR's forecasts made at the time of the last full budget, under Mr. Sunak, back in March.

On his own estimates Chancellor Hunt says the measures announced this morning (and described above) would 'save' some £32bn compared to the Kwarteng 'fiscal event'. That leaves a roughly similar amount - on consensus estimates - to be filled by some combination of further 'efficiency savings' among government departments and tax increases; increased borrowing has almost certainly been ruled out.

Where the balance lies between efficiency savings and tax increases won't be known fully until Mr. Hunt delivers his full Medium-Term Financial Plan statement on 31 October - the Hallowe'en Budget. But its significance could not be more profound - beyond its immediate impact on financial markets, it may help determine the fate of the current Prime Minister; it will characterise the remaining time of the current Parliament; and it will weigh with markets at some point in their anticipation of what will come after this Parliament has run its course.