Thoughts on Jeremy Hunt and Tax Cut U Turn
Published / Last Updated on 18/10/2022
Jeremy Hunt yesterday reversed all but a couple of elements on Kwasi Kwarteng’s September Mini Budget. This was aimed at trying to stabilise confidence in UK markets and government.
Mr Hunt reversed proposed income tax cuts so that we will remain at 20%, 40% and 45% tax rates. This is sensible in our opinion. Now is not the time to cut taxes.
The 1.25% cut in National Insurance contributions was retained for employees and employers but the 1.25% increase in tax on dividends remain.
Energy price cap support will only be maintained until April 2023. This tells us there will likely be a ‘Plan B’ and we expect fireworks in the Autumn Budget on 31 October 2022 for energy.
Our Take on Actions So Far
Nothing was done or proposed to be done to cut inflation. There was no VAT cut and is still not. There was no additional windfall tax applied to energy companies. We hope there is more in the 31 October Budget.
Limited companies will now pay more corporation tax as originally proposed. Owner/directors of businesses will also pay an extra 1.25%. It is clear the government expects businesses to pay their fair share of tax to pay back support during ‘lockdown’ for grants, furlough pay and recovery loans.
We must all accept that there is still more tax revenue needed to pay off national debt. We need to build confidence in the UK to move forward with a competent government and growth after the coming recession.
The Bank of England should increase interest rates by at least 0.75% increase to 3.0% pa on 3rd November. We must all tighten our belts given we have all become used to low taxes and low costs of goods and services.
Not Government’s Fault Alone
This is not all the government’s fault as Mr Starmer would have you believe although instability clearly is. Higher inflation and interest rates were predicted by us, but we could not have seen the Russian invasion of Ukraine and the effect on energy supply and costs driving inflation up even higher than we anticipated. We told you in May/June 2020 that we are all going to have to pay for covid-19 and to expect inflation and interest rate increases and now we have them.
If you received support during lockdown or with energy grants, then we will need to pay it back in the form of taxes. There is no free lunch here, the government borrowed to support the population and it must be repaid.
Inflation is not going away; Europe must wean itself off Russian oil and gas. The iron curtain is now definitely down again. Greener and alternative energy sources cost more and will mean our fuel bills remain high. Plan for this, do not think energy prices are going to fall. We have told you many times that all Governments need inflation to devalue debt so modest inflation will remain for a number of years yet. 5% pa inflation over a 10-year period is cumulatively 62%. With inflation at these levels the government will have devalued fixed rate government debt by 62% over 10 years before it is due to be repaid over the next 20 or 30 years.
Conclusion
Get used to higher inflation i.e., higher prices, higher interest rates on our mortgages and higher taxes on our income, gains, and profits. We have all got to tighten our belts.
Expect more windfall taxes on energy companies. We suspect also that buy to let and investment property will be targeted with higher capital gains tax. Investment property is the lowest hanging fruit and many landlords will be thinking about selling up property as new fire safety regulations confirmed this year and new energy performance certificate ratings (EPC) come into force in 2025 and 2028. This is clearly a good time to increase taxes on investment property when many will be thinking of selling.
