The Back to the Future ‘Mini-Budget’

These are strange times for all of us, but for Gen Xers like me, who grew up at the end of the Cold War, lately I’ve been feeling like Marty McFly in the cult 1980s Back to the Future films: wondering if my DeLorean’s dodgy flux capacitor has landed me in 1985, 1955 or 1885.

We now have a Chancellor and a Prime Minister, both born in the 1970s and still under 50 years old, who seem to view Ronald Reagan and Margaret Thatcher as their lodestars – leaders who were in their political prime when Kwasi Kwarteng and Liz Truss were still in primary school.

Yet they display an almost religious reverence for aspects of those former leaders’ approach: tax cuts (predominantly benefiting the wealthy), deficit spending, privatisation, and deregulation as a boon to business and an ‘unashamedly pro-growth’ attempt to attract investment. The flip side of course involves cracking down on social welfare and labour rights. Sound familiar? Maybe not if you were born after 1990.

This approach, known in the old days as ‘trickle down economics’, is being presented by these new leaders as ‘trying something different’ and ‘challenging the orthodoxy’. Really? Others would argue that much current social inequality in the UK has its roots in those very policies from decades ago, and we’ve been trying unsuccessfully to repair the damage ever since (Levelling Up, anyone?).

Even former Conservative Chancellor Ken Clarke described it as ‘the kind of thing that’s usually tried in Latin American countries without success.’ And in slightly more diplomatic language, the International Monetary Fund (IMF) recommended against the new government’s ‘large and untargeted fiscal measures’ that would ‘likely increase inequality’.

Perhaps it’s understandable that the fourth government led by the same party over the past 12 years would try to differentiate itself from its predecessors. But going Back to the Future seems a risky strategy, both politically and economically. So far, the markets seem to think so at any rate.

As it turned out, the ‘Mini-Budget’ announced by Chancellor Kwarteng at the end of September, packaged as ‘the Growth Plan’, was anything but mini. If adhered to, it will have massive implications for the country’s public finances. I’ll leave the complex economic analysis to others far more qualified, but it’s worth pointing out that in the absence of official forecasts by the Office for Budget Responsibility we have all been relying on charities like the Institute for Fiscal Studies, the Resolution Foundation, the Joseph Rowntree Foundation, and ProBono Economics to do the number-crunching and analysis.

Apart from these broad indications of the direction of travel, the ‘mini-Budget’ included some key points for charity folk to take note of.

Energy

The only time the ‘Growth Plan’ mentioned charity was in its reaffirmation of announcements made earlier in the week about the Energy Bill Relief Scheme (EBRS) for non-domestic users. This is to be in place from October to March and provides a ‘discount’ on wholesale gas and electricity prices, by creating a price ceiling for electricity and gas which energy suppliers can charge.

After much lobbying by members of the Civil Society Group and many other charities, charities are thankfully eligible for the scheme. The statement reiterated that there will be a ‘review into the operation of the scheme in three months to inform decisions on future support after March 2023, focusing in particular on identifying the most vulnerable non-domestic customers and how to continue assisting them with energy costs’, which we now much seek to influence.

Tax and Gift Aid

As was widely trailed, the Chancellor confirmed that government will ‘cut National Insurance contributions from November and cancel the Health and Social Care Levy’. Effectively this rolls back the previous government’s revenue plan to support the health service to recover from the aftermath of the pandemic and help fix our creaking social care system. It offers some imminent financial benefit for those charities with staff, but no funding solution for these huge social problems.

What was a slightly bigger surprise was the Chancellor’s announcement that a cut in the basic rate of income tax from 20% to 19% would be brought forward to April 2023. This has implications for Gift Aid, which thankfully were considered in advance this time, unlike with one of George Osborne’s Budgets from the Coalition Government.

To ease the impact on Gift Aid, the government committed to a ‘four-year transition period for Gift Aid relief…to maintain the income tax basic rate relief at 20% until April 2027’. In the longer term this will reduce the value of Gift Aid, and the effect on donations of the removal of the top rate of tax on giving and philanthropy is unknown (the Chancellor abolished the top tax rate of 45%). However, policy advocacy over many years by various charity infrastructure groups like the Charity Tax Group has thankfully averted another short-term cliff edge reduction in Gift Aid with the inclusion of this transitional relief.

Bankers and Benefits

Perhaps the sharpest contrast in the not-so-mini-Budget was between the treatment of some of the wealthiest and poorest in our society. Analysis so far indicates that the tax measures benefit the richest taxpayers most, whilst giving relatively little or no benefit to low- and middle-income earners. The Resolution Foundation concludes that ‘almost half (47 per cent) of the gains will go to the richest 5 per cent of households’.

The Chancellor himself seemed to drive this contrast home by further squeezing people on benefits like Universal Credit, many of whom are already in work. Changes to the rules mean that ‘around 120,000 more UC claimants who are in work on low earnings…will be expected to actively search for work and attend weekly or fortnightly appointments at a jobcentre in order to secure more or better paid work, or they could have their benefits reduced’.

This is likely to hit people who work part-time, including many disabled people and women. The Chancellor also announced he was getting rid of the cap on bankers’ bonuses too. Perhaps he thinks working mums in low-wage jobs who can’t afford more childcare just need to go find work in the City?

Looking ahead to the next ‘fiscal event’

Since this non-mini Budget, the UK has experienced unusual economic turmoil which is bound to have political implications. In an attempt to calm markets, the new Chancellor did announce a date for his next ‘fiscal event’ – 23 November – less than two months away. A lot can happen in that time, so mark your diaries and stay tuned to DSC Daily and @DSC_Charity for the latest updates and analysis.