Jeremy Hunt rewrites Government’s entire economic policy, setting taxes on course to rise to their highest level since 1950, and energy bills to rise to £4,000 next Spring 17 October 2022 The new Chancellor has reversed 60 per cent of the mini-Budget’s tax cuts and committed to scale back energy bill support next year in order to reduce the pressure on the Bank of England to raise interest rates, and on the Treasury to cut public spending, the Resolution Foundation said today (Monday). The Foundation notes that Jeremy Hunt has not only reversed the majority of the mini-Budget tax cuts, but also scrapped Rishi Sunak’s 1p cut to the basic rate of income tax. This latter move saves almost £6 billion and makes very clear that this is a tax raising parliament. The Foundation’s analysis shows that for a typical household these latest policy changes have reduced the size of the tax cuts from the mini-Budget next year from £500 to £290, driven by the scrapping of the rise in National Insurance which remains in place. For the richest 10 per cent of households, their tax cuts have been reduced from £5,380 to £1,650. The latest U-turns also mean that all permanent tax and benefit changes announced over the course of the parliament will now do more to push down on household incomes. The Foundation notes that the typical household will see their incomes fall by £1,000 as a result of personal tax and benefit changes in 2025-26, compared to £780 at the time of the mini-Budget. Having promised to reduce taxes, the Government is now setting taxes on course to rise as a share of GDP to around 36 per cent by the end of the parliament – up from 33 per cent at the start. This would bring the UK’s tax take up to its highest sustained level since 1950-51. The Chancellor has also said that the Energy Price Guarantee will now be brought to an end in April 2023, 18 months earlier than originally thought, with a review launched to find a more targeted – and cheaper – replacement. This could save the Treasury up to £40 billion next year (2023-24), at the price of allowing the Ofgem energy price cap to rise to £4,000 next April (on the basis of current wholesale gas prices). These radical policy reversals on tax and energy bill support by Jeremy Hunt show that the priority now is to reduce pressure on the Bank of England to raise interest rates, which it would otherwise need to do to counter the Government’s fiscal boost’s upward pressure on inflation. The measures should both directly (where they permanently reduce borrowing) and indirectly (in so far as they lower interest rates and therefore the Government’s debt interest bill) reduce the scale of spending cuts to be announced on 31st October. The Foundation notes that if today’s announcements calm the financial markets and reduce interest rates by, for example, 0.5 percentage points, this would reduce borrowing costs by a further £8.1 billion, adding significantly to the £32 billion of lower borrowing that tax U-turns announced since the mini-Budget amount to. However, the Foundation warns that given the size of the fiscal hole facing the Government, today’s measures will reduce rather than eliminate the spending cuts set to be announced on 31 October. Cuts totalling several tens of billions of pounds are likely to be announced if the Government is to meet its fiscal rule of having debt as a share of GDP falling in the medium term. 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 31st 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.” Notes to Editors Forecast energy costings based on wholesale gas futures curve data on October 14th, the last full day of trading before the Chancellor’s announcement. These show monthly NBP gas contracts for the 2023-24 financial year comprising an average of 377 pence per therm. An annual cost was calculated from the difference between these NBP contracts and the ‘supported price’ of £75 per megawatt hour (equivalent to approximately 215 pence per therm) provided by Government for the non-domestic Energy Bill Relief Scheme. While no comparable figure has been provided for the domestic Energy Price Guarantee this ‘supported price’ roughly equates to a price cap level of £2,500. Estimations of a summer 2023 price cap were made using the same NBP forward curve, and assuming that other bill components are held constant. Additionally, it is assumed that the costs of environmental and social levies are reinstated on energy bills following the expiration of the Energy Price Guarantee. Further analysis of today’s announcement will be published later today.
