BCW Political Insights: ‘A new approach for a new era’September 23, 2022

Today politics has picked up where it left off. After handwritten notes delivered to the Prime Minister and Leader of the Opposition on the floor of the House of Commons acted as the starting gun on the extraordinary fortnight of grief that the country has endured in response to the death of Queen Elizabeth II, parliament returned to the Truss administration’s response to the cost-of-living crisis.

Immediate Reaction
This fiscal event is ideological dynamite: as the Shadow Chancellor said, it demolishes 12 years of Conservative economic policy and replaces it with the economic programme that the Conservative libertarian right have been practicing in front of the bathroom mirror their entire lives. Reaction has unsurprisingly fallen on party political lines, with one Conservative MP saying “rejoice, we are Conservative again” and the Shadow Chancellor saying “working people are left to pick up the bill” for unfunded tax cuts.

Announcements
Today’s announcement – not a budget, but a ‘fiscal event’, a designation that allows the administration to circumvent the usual 10 week waiting period required for impact assessments of budget measures - gave us 30 major announcements, fully costed, more than you would expect in some years from a budget speech.

These were trailed to the media overnight and deployed with startling speed in the House of Commons. Kwasi Kwarteng was on his feet for just 25 minutes, and in that time he set out three priorities for the Truss administration.

Reforming the supply side of the economy
Major announcements were promised across ‘all areas of government activity’ from digital to agriculture, but Kwarteng focused on infrastructure, the big ticket items, in his speech. He announced the government would ‘unpick’ growth stifling regulation, publishing a list of projects to be ‘prioritised’ for acceleration.

The government committed to freezing household energy bills at £2,500 and subsidise wholesale energy prices for businesses. It estimated the total cost of the energy package for six months from October at around £60 billion.

Maintaining a responsible approach to public finance
Promising to maintain the “sacrosanct” independence of the Bank of England, and to provide full OBR assessments of the impact of these policies ahead of the new year, with further assessments to follow in Q1 is the Chancellor’s way of mitigating the lack of third-party scrutiny of this fiscal event.

Cutting taxes to improve growth
In this section of his speech the Chancellor abolished the top rate of tax, cut the basic rate to 19%, cancelled the introduction of the Health and Social Care levy, reversed the national insurance payments increase, froze corporation tax at 19%, froze the annual investment allowance at £1,000,000, guaranteed tax free shopping for tourists, and announced major cuts in stamp duty. He also removed the cap on bankers’ bonuses and cancelled rises in alcohol duty.

Implications for business

Growth, Growth, Growth
This is the action of a government unapologetic about its ideology and target of 2.5% growth a year (the first time an annual 'growth' target has been outlined). Expect the ‘mood’ of this fiscal event to drive everything the government tries to achieve in the next few years: the growth agenda is firmly where Truss believes her electoral prospects in 2024 will be made, or broken. Aligning your business to this thinking, demonstrating the value you add in communities across the UK, and backing projects like the “investment zones” through your own investment will give business a seat at the table.

Getting Britain Building
A bonfire of regulation began today with a number of bold commitments: from a government pledge to dispose of state-owned land, to announcement of the details of the ‘investment zones’ strategy. In both cases, the government will be looking for significant third-party endorsement of their measures at this stage, and businesses that can offer a eye catching partnership on either of these areas are likely to be held up as positive case studies and build opportunities to shape how these policies are delivered.

Trade Unions
The government has moved to significantly curtail the power of the unions, announcing it will legislate to require trade unions to put pay offers from employers to a vote of members. This is so strikes can only be called once negotiations have fully broken down, Kwarteng told the Commons. With this, the relationship between employers and their employees becomes less mediated through the union movement, and the importance of sensitively managed internal communications, always critical, becomes absolutely essential.

BCW View: Matt Sutton, Associate Director, Corporate & Public Affairs:

"Today’s ‘mini-budget’ was the new government’s first attempt to demonstrate its core Conservative credentials, following the conclusion of a leadership contest which illustrated the stark divides across the Tory parliamentary party.

Prime Minister Truss and Chancellor Kwarteng, kindred economic spirits, have sought to appeal not only to the Party’s core base, but also to build bridges with colleagues in the Commons.

The next real test of this ‘push for growth’ will be how it is received by the Conservative grassroots at the upcoming Party Conference next week in Birmingham. The Prime Minister will no doubt hope that as well as incentivising greater investment and job creation in the UK, it will also convince her Party that she has instigated the right strategy to win the next General Election."

What commentators are saying:

Andrew Herrop, General Secretary, Fabian Society: "This was the most ideological, unequal and reckless budget Britain has ever seen. The best paid people in the country just saw their marginal tax rates cut by 6.25 per cent while millions cannot afford to heat or eat."

Ryan Shorthouse, CEO, BrightBlue: "The cuts to Stamp Duty are well-targeted. It extends more generous relief to first-time buyers, giving them a better chance in the market against property investors #MiniBudget"

Robert Colville, Director, CPS: "Not to blow trumpet, but: - Cancelling CT rise - Unapologetically pro-business agenda - Stamp duty - Opportunity Zones - Reversing NI rise - Childcare reform - Action on energy All they need is capital allowances and it’ll be a @CPSThinkTank full house…"

Tim Montgomerie: A massive moment for @iealondon. They’ve been advocating these policies for years. They incubated Truss and Kwarteng during their early years as MPs. Britain is now their laboratory.

Those Policies in full: Energy Prices Energy price guarantee will limit bills for the average household to £2,500 The government will support businesses with their energy bills through an energy bill relief scheme that will subsidise wholesale energy prices, which will be applicable for all UK businesses, charities and the public sector The total cost of the energy support package for six months from October is estimated to be £60 billion Inflation The consensus among “independent forecasters” is that the government’s plans will reduce peak inflation by around 5% The Bank of England will consider additional steps to control inflation, with the Chancellor outlining that the Bank’s independence is “sacrosanct” Growth The government’s medium-term objective is to reach a trend rate of growth of 2.5% Barriers to Business Government will bring forward a bill to unpick regulation, with an ‘ambitious package of regulatory reforms’ set to be announced in the autumn Government land not being used will be sold off with the objective of ensuring more homes will be built To encourage further investment, and attract more financial companies to the UK, the government will remove the cap on bankers’ bonuses Strikes The government will legislate to put new conditions on unions wanting to strike, including unions having to put pay offers to a member vote Legislation will also ensure impose a minimum service level for industries during strikes Investment zones The Chancellor announced the need for new low-tax ‘investment zones’ to ensure targeted growth in areas Investment zones will have reduced planning regulations and lower business tax rates to encourage investment Tax The planned rise in corporation tax has been cancelled, and will remain at 19% Annual investment allowance will not fall to £200,000 as planned and will remain at £1 million The Chancellor outlined his desire to simplify the tax system, including closing the Office of Tax Simplification IR35 rules, which refer to anti-avoidance tax legislation designed to tax “disguised” employment at a similar rate to employment, with 2017 and 2021 reforms set to be scrapped Planned increases in duty for beer, wine and spirits are set to be cancelled, alleviating pressure on the hospitality and retail sector To attract more foreign visitors and consumption, shopping will be VAT-free for overseas visitors The planned increase in National Insurance contributions would be cancelled at the earliest opportunity, with the indicative date being the 6th November Stamp duty threshold raised from £125,000 to £250,000; for first time buyers it will rise from £300,000 to 425,000, announcing “homeownership is the most common route for people to own an asset, giving them a stake in the success of our economy and society”. The Chancellor outlined he will abolish the highest 45% rate of income tax, with the new top rate now 40%. The basic rate of income tax will be cut to 19% in April 2023, one year earlier than previously announced The Chancellor confirmed that the health and social care levy introduced by Boris Johnson’s government would be cancelled.

Conclusion: The Institute for Economic Affairs' Matthew Lesh said “The growth statement is excellent. It's hard to know where to start”. This is a government that knows what it believes, and how it wants to execute. It’s either going to be correct, or out of office, in 18 months.