Kwasi Kwarteng will probably have to revise the government’s fiscal rules to accommodate a £30bn package of tax cuts expected in Friday’s mini budget, according to experts.
One of the Treasury’s four headline fiscal rules set last October requires debt to be on course to fall as a proportion of national income by the end of the current spending review period in April 2025.
However, the chancellor is expected to push back the timescale for achieving the target in light of the nation’s changed economic situation and the tax cuts he is planning to unveil.
Measures set to be announced on Friday will include scrapping the increase in National Insurance contributions that took effect in April and freezing corporation tax, widespread briefings suggest.
There is also speculation that Kwarteng will announce a wave of up to 12 new low-tax, low-regulation investment zones designed to incentivise investment, building on former PM Boris Johnson’s freeports.
That move could be accompanied by planning reforms making industrial, commercial and residential development in those areas easier.
Many of the measures formed part of new PM Liz Truss’s successful pitch to become Conservative Party leader in the summer’s protracted campaign to find a successor to Johnson.
A the time, Truss suggested the Treasury had sufficient financial headroom to manage the tax cuts and still keep the fiscal-rule pledge relating to debt falling as a proportion of national income.
But The Times has reported that there is now an acceptance on the part of new chancellor Kwarteng that the impact of the energy crisis and the slowing economy requires measures that will affect the government’s ability to meet the target.
It said a Whitehall source indicated that while Kwarteng was committed to reducing debt as a proportion of gross domestic product over the long term, he was likely to extend the date by which the target would be achieved “into the next parliament”.
The paper said any change to the fiscal rules would take place at a formal budget, which is likely to happen in November, and be informed by Office for Budget Responsibility analysis.
Institute for Fiscal Studies director Paul Johnson concurred that the combination of large-scale tax cuts and a slowing economy would lead to more government borrowing and debt, “increasing the risk that you break the fiscal rules”.
Kwarteng will also use Friday’s mini-budget to give further details of the government’s emergency price-cap plans for average energy prices, announced shortly before the death of Queen Elizabeth II saw much public-facing government business sidelined and the suspension of day-to-day politics.
Despite the package of measures for households and businesses having a projected cost of up to £150bn, Resolution Foundation research director James Smith questioned the long-term impact on the government’s fiscal rules.
“As it's a one-off intervention, there's no reason why this policy alone should require the government to suspend, or loosen, its fiscal rules, which focus on the medium-term outlook for the public finances,” he said.
“If the chancellor does adjust his fiscal rules, it will more likely be driven by his wider economic strategy of cutting taxes, than his response to the energy bills crisis.”
In addition to the £30bn of widely-anticipated tax cuts, the Guardian reported that HM Treasury is at least considering the potential for people working or living in the proposed new growth zones to be subjected to lower personal taxes than the rest of the population.
The paper predicted that the West Midlands, the Thames estuary, the Tees Valley, West Yorkshire and Norfolk could be among the places where the zones may be sited, based on plans set out by Truss over the summer.
“Big Bang 2.0” and FCA non-execs
Other speculation about the mini-budget includes the scrapping of an EU-wide cap on bonuses paid to bankers, which has limited rewards to twice the annual salary of individual financial staffers in the wake of 2008’s global financial crisis.
The Telegraph reported today that Kwarteng was keen for the Financial Conduct Authority to fill two non-executive director vacancies with candidates who have “an appreciation of the role of regulation as a driver of growth and competitiveness”.
It framed the move as part of the chancellor’s interest in creating a growth-driving “Big Bang 2.0”, emulating the wave of financial deregulation that took place in the City of London under Margaret Thatcher in the mid-to-late 1980s.
The Telegraph said the red-tape cutting drive was part of Kwarteng’s ambition of hitting 2.5% annual growth in GDP. The drive is also believed to have been the motivating factor for new instructions said to have been given to the Treasury on its growth-promoting role, following the sacking of permanent secretary Tom Scholar earlier this month.
Prof Mariana Mazzucato, founding director of University College London’s Institute of Innovation and Public Purpose, cautioned Kwarteng not to expect a new wave of deregulation and tax-cutting to fix the nation’s economy by itself.
She told BBC Radio 4’s Today programme that a more nuanced, strategic approach was required – particularly in light of the ramifications of the UK’s departure from the European Union.
“Forget what one thinks politically of Brexit, economically what it did was massively reduce the market for UK companies, and if business investment is driven by expectations of market size and future technological opportunities, we need to make up for that,” she said.
“That’s exactly why what we need right now is not ideology, just reducing tax and trying to become a free-trade zone; no regulation and so on.
“It actually needs to be driven by smart policies, both public and private investment, but especially on the public side much more granular policy that definitely is not simply reducing taxes, which we know simply increase inequality.”