Chamber Comments on Mini Budget
In his first statement as Chancellor, Kwasi Kwarteng announced a package of new support, reversed measures announced by the previous government and set a new yardstick, economic growth over all other priorities.
Significant amongst them and one that will we welcome and believe will have the most impact on businesses, especially smaller businesses, is the reversal of 1.25% increase to NI. Greater Manchester Chamber’s Quarterly Economic Survey found that two-thirds of employers in Greater Manchester face recruitment difficulties and whilst any measure to reduce the cost of employment is welcome, these must work in tandem with incentives to unlock business investment in training and workforce development.
In keeping with the “cut tax to secure growth” theme, the Chancellor has cut the basic rate of income tax to 19% and scrap the additional rate of income tax – 45% for those who earn more than £150,000 – to take effect in the next FY. Alongside changes to personal taxation, the Chancellor has also reversed the rise in corporation tax. These are major announcements and apparently as yet unfunded. These cuts chime with the Conservative principle of low tax and high growth, and an endorsement of trickle-down economics. The progressive dimension in these measures is highly questionable. If there is fiscal room for tax cuts, why not cut the basic rate of income tax further? At a time, when many families face a heating vs eating dilemma, tax changes to benefit those on lower than median income would surely have wider impact.
The cut in stamp duty is also likely to have mixed impact. It will decrease the cost of buying a house and lessen the barriers to moving home. The reduction in stamp duty could translate into higher house prices, meaning net savings for buyers will be minimal. However, the primary housing challenge is supply not demand.
Evidence on the impact of these 'investment zones' or similar initiatives such as the old enterprise zones or more recently, freeports is mixed. They can attract businesses into a local area but there isn't enough evidence that they significantly boost employment or generate substantial additional economic growth. That is because businesses may simply relocate to a zone area to take advantage of lower taxes or easier planning regulations meaning net additional benefit is questionable. If the government is going to view investment zones through the prism of levelling up and positioning them as a means to attract investment in the North West, that can indeed be beneficial.
The Prime Minister and Chancellor have both repeatedly said that the focus should be on growth. Economic growth is indeed essential. It brings prosperity, more employment and makes the UK attractive to investment. In the current economic climate characterised by high inflation and labour market challenges one must ask: at what cost? Will the measures announced today increase inflation and need further interest rate hikes as the Governor of the Bank has indicated? What does that mean for mortgage payments and business borrowing? Will the impact then translate into lower investment or consumer spending? Those are the critical economic questions that we will have to grapple with in the coming days and weeks.