Emergency mini-Budget: The good, the bad and the ideologically ugly

Households were left to fret for weeks about what on earth they were going to do about rocketing energy prices as the Conservatives looked inwards and debated among themselves. It was an extraordinary situation.

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Eventually, of course, Liz Truss emerged as the new leader of the Conservatives and as Prime Minister.

And, in keeping with the populist style of her campaign and indeed of the governing Tories for years now with their hard Brexit drive, the stage is set for a dramatic “fiscal event” on Friday. This event – most of the news on which appears to have come from briefings rather than official statements – has also been described in the media as an “emergency mini-Budget”. Of course, the emergency has been created in large part by the Tories themselves.

The various briefings have given the impression that the “event” could be a mixture of the good, the bad and the ideologically ugly. It would certainly be a surprise if the current batch of Tories put ideology to one side in anything they did. Of course, we have not seen much good decision-making from the Tories on the economy. The support for households and businesses on energy prices announced earlier this month, and expected to form a key part of Friday’s statement, was the right call, although there is a question of whether it went far enough.

Former chancellor Rishi Sunak, of course, made a good decision in his March 2021 Budget in deciding to raise the main rate of corporation tax from 19 per cent to 25% from April next year. After all, this measure would bring in many billions of pounds a year and the Tories’ previous dramatic cutting of the rate from 28% after they came to power in 2010 did not trigger the investment they promised. However, Ms Truss has signalled opposition to raising corporation tax and there has been speculation that it could be announced on Friday that the rate will remain frozen at 19%. That would be a bad move, given the focus should be on helping ordinary households, and particularly those on low incomes, through the cost-of-living crisis. Such a focus would best support the economy by bolstering aggregate demand. It would also help to ensure that customers of businesses of all sizes have money to spend.

It is easy to long for the days when the Budget happened once a year, at a set time. In recent years, this timetable has been thrown into chaos, often for what has looked like political reasons and on occasions grandstanding.

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On this occasion, there is some justification for a “fiscal event”, if that is what the Tories want to call it, given the huge package of support for households and businesses on energy prices. Experts have estimated this could cost up to £150 billion but no figure has yet been provided by the Government. This package is clearly absolutely crucial – it will put in place a £2,500 per annum price cap on electricity and gas bills for a typical dual fuel household from October 1 for two years.

It is crucial to bear in mind this is around double the £1,277 per annum figure prevailing from October 1 last year. However, it is far less bad than what was about to happen before the Conservative Government’s extremely belated intervention earlier this month. Regulator Ofgem had in late August announced a rise in the cap to £3,549 per annum from October 1. And it had been projected by experts that the cap could, based on forward wholesale gas prices, rise to more than £7,000 from next April.

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As the UK faces a dismal cost-of-living crisis, there should never have been any doubt that the energy price problem was the priority for government intervention. Of course, this indisputable emergency on energy prices is, as well as being fuelled by global factors, also to an extent home-made given the UK’s woeful lack of energy security in the wake of the Tory privatisation spree.

Thankfully the immediate emergency has been addressed in large part for consumers for two years, although embattled businesses understandably want to see far more detail about what the support provisions are for them. Hopefully, more detail will be made available at the time of the “fiscal event”.

There is no doubting the fiscal purse-strings need to be loosened to help households and businesses through the energy price emergency and general economic woe, and this can hopefully help to some degree shore up tax revenues by preventing the impending recession from being precipitous.

Ahead of the Government’s “fiscal event”, we have also had much talk about the possibility of this April’s hike in national insurance contributions being reversed by Ms Truss.

This hike had always seemed unwise, even if its impact was mitigated to some extent by an accelerated rise in the threshold, given it looked like premature fiscal tightening. And we must remember that rampant inflation has increased hugely the income tax burden of many households. Annual consumer prices index inflation was 9.9% in August, having been 10.1% in July, and the projections are that it could go significantly higher. The increased income tax burden is because, while nominal pay levels have risen (though generally not by enough to cover inflation so people’s living standards have been eroded greatly), income tax thresholds are frozen.

Reversal of the national insurance rise will be more a matter of debate than the need for the emergency package on energy prices. And consideration of the national insurance issue must be balanced with the need to help low-income households through the current crisis, That said, there is certainly a case for reversing the rise in national insurance rates, not only for individuals but also for under-pressure businesses.

However, an ideological freezing of corporation tax is absolutely not what is needed right now. The UK was already competitive on the corporation tax front when the main rate was at 28%, so moving it up to 25% from 19% would not be a problem. The previous cuts in corporation tax failed abysmally to boost investment, as companies kept their hands in their pockets or just paid out extra in dividends. And it would be foolish to lose the many billions of pounds of revenues that would be brought in from the planned rise in corporation tax.

Ms Truss and her Cabinet should not feel they have money burning a hole in their pockets, given the surge in public sector net debt from £1 trillion in 2010 to £1.8 trillion under the Tories even before the pandemic hit.

If they feel they do, however, perhaps they should think about deploying extra money to make the energy price cap lower, or provide further assistance to lower-income households.