With inflation up around 10 per cent and many reeling from the rising cost of living, the expectation is that the government will honour the triple lock and provide pensioners with a much-needed boost in their income.
But is the expectation founded given the min-budget and the huge giveaway that is set to cost the country billions?
Borrowing as a result of tax cuts is expected to nearly double to around £160 billion (€170 billion), which many experts already say is unaffordable. Honouring the triple lock, which the government has failed to do year-on-year will cost the country more than £10 billion (€13 billion) annually. Under normal circumstances that should be within the government’s reach, but there was nothing normal about this budget.
The Bank of England has warned that the country is headed into recession, inflation is rampant and interest rates are on the up. What is needed is a quick win to boost the economy, one that will provide the government with the funds it needs to afford the triple lock.
But trickle-down economics, the model favoured by Prime Minister Liz Truss, is not known for providing quick wins and that along with the massive increase in borrowing raises the possibility that pensioners will pay the price.
The accusation followed mounting evidence of excessive borrowing by the new chancellor to fund the growth plans and tax cuts proposed by the new prime minister in her bid to become the leader of the Conservative Party.
That plan has seen the pound fall to near historic lows against the dollar raising the spectre of further imported inflation and counteracting measures to reduce the steady increase in the cost of living. With the government has implemented a cap on the price of energy by funding the difference, the cost of doing so will rise even further as the pound sinks. The energy price cap and the fall in the price of petrol are the two main drivers of the reduction in the UK’s inflation rate, but with the pound falling these costs will both rise.
The good news in the budget is the expectation that the government’s energy plan will reduce peak inflation by around five percentage points, whilst the decision to retain the Annual Investment Allowance for businesses at £1 million (€1.32 million) is expected to bring forward delayed investment in some plant and innovation.
The proposals are a big gamble for the new cabinet, who have effectively pinned their hopes on stimulating the economy through tax cuts. Whether the stimulus will have the desired effect in the short term remains, as it does whether investors regain confidence in the plan, the currency and the economy.
The trade unions certainly don’t think so.
One of the criticisms is the budget has not been accompanied by an Office of Budget Responsibility (OBR) impact assessment, whereas others have said the budget is too focused on the “rich” with little in the budget for those on lower incomes.
Investor response has been negative with the pound still trading well down on yesterday’s levels although it is expected to recover somewhat later in the day.
A budget unashamedly for the rich, criticism has come from small business owners and organisations who say that they have been thrown to the wolves. Many were expecting some assistance, particularly those in the hospitality sector who were pinning their hopes on a VAT reduction to help bring back punters.
Criticism has also been levelled at the reduction in stamp duty, which is minimal, but which also will do little to stimulate the economy at a time when interest rates are rising. Those that level criticism, which in fairness does make extra allowance for first-time home buyers, say the reduction will be of little and will if anything help to shore up house prices. In other words, it is possibly going to be of more benefit to sellers than buyers.
The mini-budget and the proposed extra borrowing will see government debt rise to over £160 billion (€170 billion) has not been received well by markets with the pound falling to its lowest level against the dollar in more than 37 years.
The mini-budget announced by the new Chancellor of the Exchequer Kwasi Kwarteng on Friday, September 22, lives up to Prime Minister Liz Truss’ promises to reduce taxes, which she says are the key to the recovery of the UK economy.
The cuts and changes announced by Kwarteng are:
– The reduction in the basic rate of income tax to 19p from April 2023
– The replacement of the marginal tax rate of 45 per cent with a single top rate of 40 per cent
– A cut in stamp duty with the limited raised to £250,000 and £425,000 for first-time buyers
– A reduction in benefits for those who do not fulfil their job searching commitments
– The planned increase in corporation tax has been scrapped keeping the rate at 19 per cent
– Removal of the cap on bankers’ bonuses with new legislation to bring about regulatory reform
– Reform of the insurance price cap to make it easier for these companies to invest in UK assets
– A new bill to reform planning restrictions and EU-derived laws that the chancellor says “constrain our growth”
– A cut in the business taxes in designated sites
– Legislation to require unions to put all pay offers to a member vote
– A ban on strikes being called before negotiations break down
– The introduction of VAT-free shopping for foreign visitors
The Chancellor is now talking about how the cuts will be funded, with an update to follow.
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