‘High growth, low tax’ was the economic mantra of the Liz Truss leadership campaign during the summer.
Next Friday we will see this philosophy put into action for the first time when the new Chancellor Kwasi Kwarteng delivers his first ‘fiscal event’ akin to a mini Budget to the House of Commons.
Kwarteng, a former investment banker who was Business Secretary under Boris Johnson, has promised to prioritise growth, especially in the City of London where he is considering lifting the cap on bankers’ bonuses initially brought in after the 2008 financial crisis.
The Chancellor is expected to reduce Corporation Tax, a major pledge by Liz Truss during the leadership election, and has ruled out further windfall taxes on oil and gas companies.
Liz Truss also pledged to reverse the rise in National Insurance from earlier this year, arguing that the money is better spent in people’s pockets as they struggle with rising food, fuel and energy prices.
The biggest question surrounding the Chancellor’s statement next week is how the government’s £100bn+ support package for energy bills will be financed.
In her first week as Prime Minister, Liz Truss announced that the domestic energy price cap will be capped at £2,500 for the average household for the next 2 years, and that equivalent support for businesses would also be announced.
Although it has not been confirmed how the Treasury will fund this £100bn+ package, it is expected to be through a premium on energy bills which could last for up to 20 years.
The government is also expected to borrow more from international banks and partners to cover the initial costs and ensure a smooth transition when the energy price cap changes in October.
The detail that Councils and business owners across the country will be waiting for is what the support for businesses will look like. Everyone from leisure centres to pubs and public services like libraries and Council offices are seriously concerned about this winter’s energy bills, coupled with the rising inflation and cost of essentials like bills and food leading to many customers cutting back on extras like gym memberships, swimming lessons for kids and trips to the pub.
Unlike domestic energy bills, which usually change every six months with the price cap, business energy bills are usually fixed for 1-2 years and are based on wholesale prices at the start of the fixed contract with no regulated price cap, meaning if a business were to renew their contract now it would be linked to the sky-high price the energy market is selling at today and will remain at that price for up to 2 years, even if the market eases after several months.
There are several options available to the government to tackle this. Firstly, they could cap the business energy prices at a similar level to domestic prices for the next 2 years, giving businesses stability and peace of mind that they won’t be paying market-value for their energy this winter and beyond. This is the most likely option, but it would have massive consequences for the Treasury, with energy-intensive businesses like factories often using the equivalent energy of many thousands of domestic properties, all of which will be added to the growing support package that will need to be eventually repaid by domestic and business consumers.
A second option would be to limit the length of businesses fixed-term contracts to 3 or 6 months rather than 1-2 years. This will ensure that businesses renewing their contracts at today’s high prices do not pay over-the-odds for energy if the market eases in the coming months and years. However, this will not help businesses in the short term, who are already facing closure this winter. It is also heavily reliant on the energy market returning to pre-crisis levels much quicker than experts are predicting, with industry consultants Cornwall Insight saying the price of energy could double from current levels before it falls. This is therefore the least likely option as it relies heavily on market trends going against all predictions and modelling.
Finally, financial support could be targeted to specific industries and services critical to national infrastructure such as schools, hospitals and social care homes, and Council-run infrastructure like streetlights and public parks.
This would mean that essential services are less impacted by the energy price change, but non-essential services such as leisure centres, pubs and restaurants are left without significant financial support.
As many of these services are already facing potential closure this winter, the government giving support to some industries but not others could result in mass closures and irreversible damage to specific sectors this winter.
Opposition parties are almost unanimous in their calls for further windfall taxes on oil and gas companies to fund wide-reaching support for domestic and business customers this winter and beyond.
The Labour Party estimates that oil and gas companies could make in excess of £170bn in unexpected profits over the next 2 years which could fund a significant price cap freeze for both domestic customers and businesses, but industry experts and the government have criticised this approach saying that much of the £170bn figure is in global profits, not just those made in the UK market.
Keir Starmer has challenged the government to release their estimates so that these figures can be compared and reviewed but the Chancellor has so far decided not to release these estimates into the public domain.
Meanwhile the EU has announced that it will levy a windfall tax on excess oil and gas profits this year. They believe this will raise £130bn which can be used to offset the worst effects of this winter’s energy price surge. The UK will not be part of this.
It is clear, however, that oil and gas companies will make significant profits in the UK market in the coming years, and a windfall tax on excess UK profits could still fund tens of billions of pounds in support, reducing the amount domestic consumers will need to repay through energy premiums over the coming decades.
Many Conservative MPs will be placed in a conundrum by their new Prime Minister when they are forced to relay to their constituents that the will still be paying £5,000 in energy bills for this winter, but over a longer period of time. Especially when a windfall tax on excess profits would like mean consumers would not have to pay a penny more than the £2,500 cap. It will be interesting to see how these arguments fair in marginal constituencies in the so called “red wall”.
Whilst Liz Truss has ruled out any windfall taxes, labelling them anti-growth and arguing it could deter investment in domestic energy generation, she may be forced to revisit this plan if she faces a significant rebellion from marginal MPs.
Whatever support the government provides to businesses on Friday, the cost to the Treasury is expected to be higher than that of the furlough scheme during the COVID pandemic, potentially putting many other projects on hold while the government prioritises domestic support. Quite what this means for monies committed earlier in the parliament to Levelling up, hospital-build programmes and social care reform, remains to be seen.
The cost-of-living support to domestic customers and businesses will take many years to repay, and Truss and Kwarteng will be hoping that a reduction in Corporation Tax and the removal of the cap on banker’s bonuses will grow the economy enough to fend off fears of a winter recession and restore confidence in the British economy after years of uncertainty.
Before she took office, many Conservatives privately remarked that Truss had just six months. In that time she needed to steer the country through the winter on a sound economic footing. Next week is a major gamble for her just a fortnight into her premiership.
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