New chancellor scales back help with energy bills, promising ‘new approach’
Image credit: Dreamstime
In an effort to stabilise the financial markets, Jeremy Hunt has announced that help with energy bills for all households will only last until April 2023, after which time the government will hold a review to look at a “new approach” to target support for those worst off.
Hunt - Kwasi Kwarteng's replacement as chancellor in the Liz Truss cabinet - confirmed that he is ditching many of the measures announced in his predecessor's somewhat ill-judged mini-budget, including the planned cut to income tax.
In an emergency statement, Hunt said: “We will reverse almost all the tax measures announced in the growth plan three weeks ago that have not started parliamentary legislation.
“So whilst we will continue with the abolition of the health and social care levy and stamp duty changes, we will no longer be proceeding with the cuts to dividend tax rates, the reversal of off-payroll working reforms introduced in 2017 and 2021, the new VAT-free shopping scheme for non-UK visitors or the freeze on alcohol duty rates.”
Hunt also dramatically scaled back planned support for household energy bills, in an effort to restore stability following the recent period of turmoil on the financial markets.
In his statement, Hunt said the energy price guarantee – which had been put in place to cap prices for two years – will now end in April 2023, after which time the government will look to target help for those most in need.
The "new approach" - details of which are not yet confirmed - is intended to “cost the taxpayer significantly less”.
The new chancellor said: “The biggest single expense in the growth plan was the energy price guarantee. This is a landmark policy supporting millions of people through a difficult winter and today I want to confirm that the support we are providing between now and April next year will not change.
“But beyond that, the prime minister and I have agreed it would not be responsible to continue exposing public finances to unlimited volatility in international gas prices.
“So I’m announcing today a Treasury-led review into how we support energy bills beyond April next year. The objective is to design a new approach that will cost the taxpayer significantly less than planned whilst ensuring enough support for those in need.
“Any support for businesses will be targeted to those most affected and the new approach will better incentivise energy efficiency.”
Hunt also said that he is abandoning plans to cut the basic rate of tax by 1p – which had been due to be brought forward to April – and that it would remain at 20p in the pound until the country can afford to reduce it. The 1p cut had been forecast to cost the Exchequer almost £5.3bn in revenue for 2023-24 alone.
The cut in dividend tax promised by his predecessor has also been axed, along with the notion of VAT-free shopping for overseas tourists, a freeze on alcohol duty and the easing of the IR35 rules for the self-employed.
Hunt claimed that these tax measures alone would bring in £32bn for the Treasury, after economists estimated the UK government was facing a £60bn black hole in the public finances.
In a televised statement, the chancellor warned of more “tough” decisions to come, hinting at further cuts to government spending.
“Growth requires confidence and stability and the United Kingdom will always pay its way," he said. "This government will therefore take whatever tough decisions are necessary to do so.
“Governments cannot eliminate volatility in markets but they can play their part and we will do so, because instability affects the prices of things in shops, the cost of mortgages and the values of pensions”.
The threat to government spending was signalled by Hunt, who said: “There will be more difficult decisions, I’m afraid, on both tax and spending as we deliver our commitment to get debt falling as a share of the economy over the medium term.
“All departments will need to redouble their efforts to find savings and some areas of spending will need to be cut. But as I promised at the weekend, our priority in making the difficult decisions that lie ahead will always be the most vulnerable and I remain extremely confident about the UK’s long-term economic prospects as we deliver our mission to go for growth.”
Following Hunt's announcement, the pound strengthened by more than 1.2 per cent to 1.139 against the US dollar. UK government bonds also rallied, with the yields on 30-year government bonds, or gilts, easing back further by around 10 per cent, as the new chancellor set out his plans to shave billions off the government debt. The interest on long-dated bonds hit a low of around 4.32 per cent shortly after the first announcement.
Hunt's long-term future spending plans will be submitted to the Office for Budget Responsibility in due course.
Responding to the latest mini-budget announcements, Mike Foster, CEO of the Energy and Utilities Alliance, said: “News that the energy price cap protection [is] coming to an end in April will surprise and worry millions of hard-pressed families. Together with the announcement that promised tax cuts have also been withdrawn will heap huge financial pressure onto those already struggling to pay their bills.
“The Treasury-led review to support families in the future looks like an excuse to cut support in these uncertain times, when we don’t know what energy prices will be. While all this is happening, the government’s own ‘Boiler Upgrade Scheme’ hands out £5,000 subsidies to the well-off to change their heating, while millions struggle to pay their bills. It’s immoral in these difficult times and needs to be culled, with the money used more wisely.
“This reinforces our view that in the longer-term we need to switch away from fossil gas and switch our gas network to hydrogen. We can produce ourselves and free us from the global gas markets that Putin’s war has massively impacted.”
Reflecting on the ramifications of Hunt's budget reversals for business and retail, David Jinks, head of consumer research at logistics firm ParcelHero, said: "Hunt’s emergency statement has a dark side for businesses; it’s very much a two-edged sword. Businesses are already reeling from the corporation tax chaos. The on-off-on rise of this tax on businesses, from 19 per cent to 25 per cent, has caused significant confusion. MHA, the network of independent regional accountancy firms, says the restoration of the tax increase is a 'big blow' for businesses and the U-turn is a 'significant setback.
"A number of other handbrake-turns from last month’s mini-budget will also have a significant impact on retailers. Abandoning plans to scrap VAT paid by foreign visitors in UK stores will not please many retailers. They were eagerly anticipating a spending spree from wealthy US and Middle Eastern shoppers.
"The Association of International Retail says the original scrapping of tax-free shopping back in 2019 cost 20,000 jobs and lost a significant amount of the £28.4bn foreign visitors spent in the UK annually. Retailers and their logistics partners have seen a great opportunity for renewed growth snatched away from them.
Jinks added: "Similarly, in terms of energy price caps, it looks as if there will be a lot less support for businesses than hoped for beyond April. Chancellor Hunt said that any continued support for businesses will only be targeted on those most affected and that any further measures will be focussed on increasing energy efficiency. That’s bad news for traditional, high-energy use manufacturers and their transport partners.
"Today’s statement ruthlessly dismantled most of the policies unveiled in September’s mini-budget, but it could be tough medicine for UK retailers, manufacturers and their supply chain and logistics partners. Something needed to be done following the omnishambles of September’s mini-budget, but it could still be a rocky road ahead".
This story was updated at 16:30 to include the reaction from ParcelHero’s Jinks.
Sign up to the E&T News e-mail to get great stories like this delivered to your inbox every day.