Emergency Budget 2022 – A comparison of the candidates proposals
BDO UK's comprehensive analysis ahead of the new prime minister's Emergency Budget 2022: what do Rishi Sunak and Liz Truss have in store for businesses?
With thanks to our colleague Jon Hickman, Corporate Tax Partner at BDO UK.
Despite the multitude of issues that the outgoing Boris Johnson faced, it is fair to say that the incoming Prime Minister will also have a challenging to-do list when they take office on 5 September. Whoever the winning candidate is, their early days as Prime Minister will have to include facing some very difficult financial decisions on taxes and the cost of living crisis. Here is our summary and analysis of their proposed tax policies.
What are Liz Truss’ policies?
The Foreign Secretary has talked of making tax cuts to the tune of £30bn or more, with at least some reductions taking effect immediately. The most likely immediate tax cut is to reverse the April 2022 National Insurance Contribution increase for individuals and employers as early as November (although whether this means reversing the threshold increases that took effect from 6 July is not clear). Her 2022 Emergency Budget could also confirm that the Corporate Tax increase planned for 1 April 2023 will not go ahead (costing the Treasury an estimated £15-17bn a year).
For businesses she has also promised to remove much of the EU derived “red tape” that inhibits activity as part of her long-term plan for economic growth. She has also argued strongly against the windfall tax on energy companies and ruled out any extension of it.
While Liz Truss has not totally ruled out using direct cash ‘hand-outs’ to help families with energy costs, she has said that would rather cut taxes to help families – her proposals include a moratorium on the green energy levy which currently adds about 8% to domestic energy bills (pausing it should reduce average household bills by up to £153 a year). However, as she supports the UK’s net-zero climate change strategy, this would be a temporary measure.
Another proposal to help family finances relates to the transfer of personal allowances between married couples and civil partners. Currently, where an individual does not have enough income to fully use their personal tax allowance (currently £12,570), they can elect to transfer £1,260 to their spouse/civil partner. Liz Truss is proposing that the full allowance can be transferred to help couples where one spouse is the sole earner.
Wider reform of the tax system is also on her agenda – Liz Truss would “have a complete review of the tax system” – which would specifically include a review of inheritance tax – although this is likely to be a long-term goal.
What are Rishi Sunak’s policies?
The Former Chancellor has been the outlier on tax proposals throughout the leadership contest, saying that tax cuts must wait until inflation is back under control. During his time as Chancellor he announced direct payments to households to help with the cost of energy price increases, and has suggested that further direct support will be needed to help families with energy bills. Rishi Sunak has argued that direct ‘hand-outs’ are more targeted than general tax cuts and carry less risk of stoking inflationary pressures in the economy, although he has pledged to remove VAT from energy bills.
Rishi Sunak’s income tax policies during the campaign include bringing the 1p cut in the basic rate of income tax forward to April 2023 from the planned date of April 2024. He also aims for further reductions to bring the basic rate down to 16% within the next seven years – but has made clear that these will only happen after inflation has been brought under control.
Unsurprisingly, has defended the April 2022 increases in National Insurance contributions as necessary to put NHS funding on more stable footing. Similarly, he would stick to his proposal to increase corporation tax from 19% to 25% from April 2023.
Rishi Sunak has also talked of “radical reforms’ in the way businesses are taxed, although exactly what this means is not clear. The former Chancellor’s ‘Tax Plan’ published with the Spring Statement was somewhat thin although it did encompass both reforms to R&D tax relief and capital allowances changes when the super deduction expires.
As the UK tax take is at 70 year high, it is no surprise that the leadership candidates’ debates have focussed on tax cuts. However, government borrowing is also at very high levels. The government will continue to increase its overall borrowing and is projected to be a net borrower every year through to 2025/26 and beyond, with net annual borrowing for 2022/23 set to be £99bn according to the OBR forecast at the Spring Statement. The total national debt is forecast to be 95.5% of the UK’s GDP in 2022 /23 and interest costs on the debt will rise as interest rates are increased to tackle inflation.
Spending on the COVID-19 pandemic is one of the main drivers of the high levels of debt; at the time it helped protect jobs, and there is little doubt that the fast spending decisions kept the economy ticking over during those difficult years.
Inflation after the pandemic was to be expected as the world economy restarted - even if the multiplier effect of Russia’s war in Ukraine was not. It is true that inflation is increasing the government’s tax take in the short-term, with VAT and fuel duty receipts increasing as prices rise. However, government departments are not immune to inflation – their costs will rise even if the government manages to strike pay deals with public sector workers that are well below inflation. These higher costs may eat up most, if not all, of any increase in tax revenues that inflation generates, so any ‘surplus’ to fund tax cuts may prove illusory.
What could an Emergency Budget look like?
The argument that tax cuts pay for themselves by generating growth in the economy may have some truth in times of a steady economy but, given the current economic difficulties, many question that would now be the outcome. Yet neither Sunak nor Truss has suggested that government policy under their Prime Ministership would see a return to ‘austerity’ in the public finances so that tax cuts can be delivered.
Many commentators suggest that cutting taxes now would likely need to be funded by additional borrowing – at least in the short term. Conventional economic opinion suggests that cutting taxes at a time of high inflation is risky. The International Monetary Fund has publicly stated that now is not the right time for debt funded tax cuts – particularly as business investment in the UK has not recovered since Brexit, so a quick recovery cannot be guaranteed.
Equally, increasing taxes ahead of a potential global recession is not a stance that has been adopted by many countries. When Rishi Sunak originally proposed a large increase in corporation tax in April 2023 as a way to help rebuild the Government’s finances, the Biden administration made similar proposals in the USA. However, US corporate tax rates have since remained at 21%, making the proposed 25% UK corporate tax rate look much more of an outlier than originally planned.
Neither candidate has proposed a cut to VAT to slow down inflationary pressures in the economy – although an advance announcement of such a move may prove counter-productive and it would not address supply shortages.
What do businesses want from an Emergency Budget?
A number of organisations have called for a clear, targeted, and long-term tax policy that enables businesses to make longer term investments in the UK. Prior Chancellors have set out longer term “road maps” for business taxes which were well received and helped to give companies the confidence in future UK business tax conditions. If the government under the new Prime Minister is serious about achieving some of the stated aims from the 2019 Conversative manifesto (levelling up, build up our green economy, net zero etc.), this approach may be more successful than tinkering with immediate and possibly short-term tax cuts.
If you ahve any questions, please contact your local BDO tax experts, Maybeth Shaw, Fiona Hall, Claire McGuigan, Geraldine Browne and Karen Doherty.