Two economists at The Open University deliver their verdict on Jeremy Hunt’s budget statement – his first since stepping into the shoes of his newly departed predecessor Kwasi Kwarteng.
Jonquil Lowe, senior lecturer in economics and personal finance, said:
Jonquil Lowe
The government has bowed to the financial markets and rowed back on most of the tax cuts announced in the 23-September mini-budget but the big question for households is will this be enough to satisfy the financial markets?
What haven’t been altered are:
- Changes to National Insurance, nor the Health and Social Care Levy or Stamp Duty, since these are already on their way through Parliament.
It means National Insurance rates will still fall by 1.25% from November and the Health and Social Care Levy is still scrapped.- Stamp Duty thresholds (which apply in England and Northern Ireland) have still increased to £250,000 and, for first-time buyers, £425,000.
Tax cuts that will no longer go ahead include the 1p cut to the basic rate of income tax, which remains at 20 per cent indefinitely.
Bear in mind the income tax personal allowance and thresholds are already frozen until April 2026, this means rising income tax bills for some over the next few years. Dividend tax rates will now also go up by 1.25% from April 2023 as originally planned prior to the mini-budget.
We’ve seen the financial turmoil that followed the mini-budget, and data from Moneyfacts shows that mortgage rates shot up by 1.7 percentage points in less than a month.
As the example the chart above shows, this increased the cost of new mortgages by hundreds of pounds a month, disrupting the plans of first-time buyers and home-movers and jeopardising the financial security of existing borrowers with variable-rate loans or fixed-rate loans due to end soon.
Tough times still ahead for homeowners
The early signs are that Chancellor Jeremy Hunt’s announcement may have satisfied the financial markets, with key interest rates stabilising and even falling slightly following the tax-cut reversals.
But looking further ahead, the Bank of England is still expected to raise interest rates over the coming year to tackle inflation, so there are still likely to be some tough times ahead for homeowners.
The inflation outlook is now more complex. The new Chancellor’s statement includes limiting the energy price guarantee to just six months until April instead of two years as previously planned.
The guarantee caps a typical household’s energy bill at around £2,500 a year and will still protect households this winter. Limiting the duration of the cap could add to the UK inflation rate later in 2023 if global energy prices keep on rising.
Energy price cap review
However, the government has said that the Treasury will review what happens to the energy price guarantee after April, with a view to targeting support at those households most needing help, which would be a welcome move on the grounds of social justice.
It would also reduce the upward pressure on inflation caused by providing unnecessary help to wealthier households.
Despite the U-turns on tax cuts, the Chancellor has said that there will still need to be public spending savings and cuts in some areas. This is likely to involve further erosion of public services which tends to hit lower-income households hardest.
Alan Shipman, senior lecturer in economics, said:
By drastically reducing the unfunded element in public spending plans, Jeremy Hunt has reassured financial markets and stabilised UK borrowing costs. But he has given the government a new problem.
Low-income households will still suffer, from smaller benefits and public services, as it becomes difficult to target a scaled-down energy price cap and other social benefits at those in most need, especially when present energy subsidies end in April 2023.
And many middle-income households – including the floating voters that decide elections – will now be squeezed between rising taxes and falling access to public services.
Prime ministers Cameron, May and Johnson carefully avoided a ‘squeezed middle’ by ensuring that middle-income earners enjoyed rising pay, low-cost borrowing, rising house prices, and free provision of healthcare (via a still-functioning NHS) plus education (with improving state school standards and student loans operating more as a graduate tax).
Alongside the triple-lock for uprating state pensions, this shielded the government’s core constituency from any negative income shock.
Truss’s luck has run out
With the swift reversal of her mini-budget, Truss’s luck has run out. There is now a substantial risk that many who are classified as middle-income earners, but view themselves as ‘just about managing’, will find their tax bills rising.
Means-tested entitlements shrinking even further, while loan costs rise, house prices fall and NHS waiting lists force many more to treat serious health issues privately.
The government has lost the near-costless borrowing facility that, from 2010, enabled it to keep taxes low while shielding healthcare and pensions from the squeeze on public spending.
It will not get this back, even if bond yields now subside from their recent two-decade high. Interest rates must stay high, and will settle above the Eurozone’s, to ensure the capital inflow the UK needs to finance a current-account deficit that has widened since Brexit.
A covert tax rise through the ‘fiscal drag’
Although it can present the budget U-turn as mainly the postponement of promised tax cuts, the government will almost certainly continue with its covert tax rise, through the ‘fiscal drag’ of not raising thresholds in line with inflation. The same mechanism will erode public pay and many social benefits in real terms.
Long-term projections of the fiscal deficit by the Office for Budget Responsibility, which factor-in the ageing population with its higher pension and healthcare needs, were already – under previous Chancellors – showing an escalation of debt to likely unsustainable levels without a rise in the biggest-yielding taxes, income tax and VAT.
Stagnant productivity problems
Kwasi Kwarteng, in his brief Treasury tenure, aimed to escape the coming squeeze with a surge in GDP growth, to raise tax revenue without raising tax rates. But this requires a sudden resolution of the UK’s stagnant productivity problems, which has been ten years in the making and cannot be ended overnight.
Jeremy Hunt has recognised that deficit spending cannot immediately pay for itself. But his alternative – raising taxes and trimming expenditure, even as the economy heads into recession – guarantees a squeeze on living standards that will keep the government on a very rocky path.
Visit the Chancellor’s Medium-Term Fiscal Plan measures
