On 23 September, UK Chancellor of the Exchequer Kwasi Kwarteng announced a series of measures dubbed a “mini-budget” or “fiscal event”, designed to spur growth and help to combat the cost-of-living crisis. The actions have proved controversial for a variety of reasons, not least the now-reversed removal of the 45p tax rate above £150,000, along with widespread criticisms over the financing and efficacy of the plans, coupled with the refusal to include forecasts from the Office for Budget Responsibility (OBR).
With the announcement of his medium-term fiscal plan now being brought forward to 31 October, getting it through parliament is still an uncertainty. If the proposed changes do come into effect, and considering the government’s Levelling Up agenda for the UK – a cornerstone of post-Brexit domestic politics – what effect could the mini-budget have across different regions within the UK?
Mini-budget policies
The measures put forward by Kwarteng and Prime Minister Liz Truss broadly fall into five parts, each of which can be considered individually for its regional impact.
Investment zones
The government has laid out plans to heavily reduce taxes on businesses in at least 38 local authorities, dubbed “investment zones”. The zones’ tax cuts include 100% business rate reductions on newly occupied and expanded premises, 100% employer national insurance relief for employees earning up to £50,270 per year and 100% capital allowance relief for certain plants and machinery.
The national government is currently in talks with the initial 38 local authorities in England to arrange the details of the tax cuts and will set out the process by which other authorities can apply. Scotland, Wales and Northern Ireland are not currently included due to their devolved powers, but the UK government has stated it “intends to work closely” to extend the policy outside England.
The purpose of the scheme fits in neatly with the government’s Levelling Up agenda – aspects of it will be managed by the secretary of state for the department for Levelling Up, housing and communities – although the areas included only partially match it.
When compared with the government’s levelling up priorities, many investment zones fall within priority one and two areas – particularly in the north and east of England – and generally affluent areas of the south of England are largely excluded for both. However, significant areas are designated as investment zones despite being low priorities for levelling up.
Paul Johnson, director of the Institute for Fiscal Studies, asked in the think tank’s mini-budget response “why it is better to have lower taxes in some parts of the country than others” and “whether the areas and policies chosen are appropriate for that [levelling up] objective”. Johnson also suggested that by creating targeted tax relief zones, the scheme could merely move around investment that would already have happened regardless.
Stamp duty land tax
One of the more controversial cuts is to the stamp duty land tax (SDLT), a fee that house buyers must pay as part of the purchase of the property. As part of the measure, the level at which stamp duty applies will rise from £125,000 to £250,000, and from £300,000 to £425,000 for first-time buyers. The government estimates that this tax break will reduce the amount of SDLT paid by movers by up to £2,500.
This means that, at average house prices, buyers in large parts of the north of England, Wales, Scotland and Northern Ireland will see a slight easing of the upfront cost of buying a house. But in the midlands and south of England, it is a different story. Few communities in these regions will see stamp duty cut on the average home due to the higher cost of buying a property. However, first-time buyers in all but the most expensive areas, such as London, Cambridge and Surrey, will likely benefit.
[Read more: Does cutting stamp duty lower house prices?]
Importantly though – and the reason it is a controversial measure – cutting stamp duty may backfire entirely, as effectively lowering the cost to buy a home without increasing supply could lead to higher demand and asking prices increasing by similar, if not greater, amounts. The end result of this would be comparable or higher costs for buyers but with less of that amount going towards the tax intake.
Income tax
The most widely criticised part of the Truss-Kwarteng mini-budget was the removal of the top rate of tax, which caused an internal Conservative party revolt and eventual U-turn. But this measure was also accompanied by a cut in the basic rate of income tax on earnings between £12,570 and £50,000 per year from 20% to 19%.
According to the government’s fact sheet on the tax change, basic rate taxpayers will be around £130 better off on average, and taxpayers earning over £50,000 will be around £360 better off in the 2023/24 tax year.
In terms of income percentiles, that means that roughly the top 10% of earners nationally will see the more significant benefit of the cut. However, when broken down by region, the same is true in every area but London, where the top 25% of earners will see a larger deduction. So while this tax break is applied evenly across the country, it gives a larger boost to the most affluent area of the country than anywhere else.
Cancellation of national insurance rise and health and social care levy
The mini-budget laid out plans to cancel the 1.25% increase in national insurance contributions, known as the health and social care levy, put in place by former Chancellor Rishi Sunak. Sunak’s increase to the minimum earnings threshold from £9,880 to £12,570 will stay, however – keeping it in line with income tax. The Treasury calculates that this will leave people £330 better off per year on average and that the reduced employer contributions will leave more room for investment.
However, national insurance is often argued to be a regressive tax, since the rate cap leads to higher earners paying less as a proportion of their income if they earn above £50,000. So reducing the rate can be seen as a relative win for lower earners nationwide. But the very lowest earners – those below the contribution threshold – will see no benefit from this change at all.
According to government data, the lowest 10% of earners in every region of the UK except London fall below the national insurance contribution threshold. The bottom tenth percentile of earners in London, however, earn £10,657 on average and will continue to see national insurance payments removed via the increased threshold.
Corporation tax
Along with the personal tax breaks, the government has announced its plans to cancel the planned corporation tax rise from 19% to 25% on companies profiting more than £250,000 – around 10% of UK corporations.
The government’s argument is that this will encourage investment thanks to the lack of constraints caused by taxation. However, when factoring in the location of UK corporations using ONS data, any tax benefits are likely to affect London and the south-east, where 19% and 15% of corporations reside respectively. In fact, according to research by Onward UK, reversing the tax rise will save businesses in London £5.7bn as opposed to just £355m in the north-east.
Considering this, alongside claims that the UK is ‘behaving like an emerging market’ – meaning it is volatile and uncertain – it may be that the most prosperous regions of the UK’s economy could benefit but the increased financial risk may ward off new investors.
Austerity following the mini-budget
Since the announcement of the mini-budget, expectations have grown – as well as suggestions from the chancellor himself – that it will be accompanied in future by cuts in public spending akin to those in the austerity policies of the Cameron-Osborne government.
According to research by the IPPR, the previous era of austerity disproportionately affected the north of England, with council public spending cuts near or exceeding 20% in parts of the area, as opposed to around 10% in southern regions and 1% in London. If repeated, such cuts to public services could have the potential to outweigh the take-home gains of personal tax breaks for people in northern England.
Liz Truss has claimed that there are no plans to cut spending despite pushing forward with the plan, but the IFS has stated that it would require £60 billion in fiscal tightening to stabilise the debt.
Mini-budget uncertainties and U-turns
Following the fractious reaction to the mini-budget, with splits in the Conservative party and poll swings towards the Labour party creating leads of up to 32 points, it must be noted that there is a lot of uncertainty around the mini-budget’s future.
The 45p tax rate cut has already been reversed to appease Tory rebels, and further pressure, if applied, could see other elements scrapped.
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