How a Mini-Budget could boost financial resilience – and how it risks leaving us worse off

The Mini-Budget is expected on Friday 23 September. Sarah Coles, senior personal finance analyst, Hargreaves Lansdown said: “We’ll see a major change of direction in this Mini-Budget, as Kwasi Kwarteng drives his growth agenda, fuelled by deregulation and tax cuts, in the belief it will ease the cost-of-living crisis and boost growth. But while it’s likely to offer immediate easing of the squeeze on household budgets, only time will tell whether it will improve the landscape for good, or steer us into dangerous territory.

Tax cuts will help us all in the immediate future, cutting our outgoings during a time of runaway inflation. It is being done in the belief that this will then help people spend more and companies invest more, both of which would support growth. However, this comes at a cost, and there’s the risk it could end up damaging our financial resilience over the longer term.

There’s also the question of whether there will be enough in this announcement to  support those on the lowest incomes, or to help us build our long-term financial resilience.

5 possible personal tax cuts – and their impact on resilience

  1. Cuts to National Insurance. This was something Liz Truss repeatedly pledged during the leadership contest, so is bound to be a key priority.
  2. A mention of removing green levies on energy bills. This has already been announced as part of the Energy Price Guarantee.
  3. Possible cuts to VAT. The idea of a cut emerged during the summer, with some suggesting the 20% rate could be cut to 15%.
  4. There may be a pledge to review the current tax system – including inheritance tax.
  5. There could be reference to possible tax breaks for people who take time out of work for caring responsibilities.

Short term boost: In the short-term, tax cuts will free up more money to help people make ends meet, which could make an enormous difference in the coming months to those who are already running on empty.

Long term questions: In many cases this will benefit higher earners more than lower earners, because they pay more National Insurance on higher earnings and more VAT on bigger spending budgets. And while every household will be grateful for any additional help, by fuelling more spending, this could push prices up for longer, denting our longer-term financial resilience. This, in turn could persuade the Bank of England to raise rates, which makes life even harder for those with variable rate debts.

4 policies that would help build resilience

  1. More support for those on the lowest incomes

This could mean bringing in an additional subsidised energy tariffs for those facing the biggest financial challenges, or it could mean additional payments for those on the very lowest incomes through the Universal Credit system. This group would also benefit from a review into how benefits are uprated. At times of high inflation, annual reviews, with a long lag between when inflation is measured and when it is implemented, leave those on the lowest incomes with horrible challenges. If help is offered to those who would otherwise miss bills, then it would solve a shortfall rather than necessarily increasing spending and putting pressure on inflation.

  1. Support for those whose circumstances change

We’d like to see a permanent cut to the penalty for the Lifetime ISA. Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown explains: “At the moment, if you take cash out of the LISA before the age of 60 – for any reason other than to buy your first property or retirement – you face a penalty of 25%. While it may look like you are just giving up the government bonus, it also takes a chunk of the money you have saved. It means anyone turning to this money while life is tough will pay a horrible price for having tried to do the right thing. We want to see the LISA penalty reduced to 20%, to help people use their money in the way that makes most sense for them, without losing some of their own savings at a time when they can least afford it.”

  1. More measures to improve our outgoings in the longer term

Long term reductions in energy costs have so far focused on improving supplies. However, there is an awful lot that could be done to ensure people don’t need to use as much energy in future. There needs to be a revolution in insulation, through effective incentives for people who could make affordable changes, and support for those who can’t afford to do any work at all – or whose homes make improvements prohibitively expensive.”

  1. Steps to support their resilience in the future

This should include revisiting the money purchase annual allowance. Morrissey, says: “People who are forced to raid their pension to pay the bills, or are returning to work to cope with higher prices, face a pension headache. The rules mean once you’ve taken an income from your defined contribution pension, you can’t contribute more than £4,000 a year. This was supposed to stop people accessing their pension and then re-investing it for another round of tax relief, but the same thing could be achieved with rules which only kick in when someone has done this with the express intent to recycle the cash.”

3 measures that could be announced to support growth

  1. A reversal of plans to increase corporation tax from 19% to 25% in April. Liz Truss and Kwasi  Kwarteng believe that tax cuts support investment and growth, and that tax rises would hamper both.
  2. Targeted cuts to VAT for specific sectors like hospitality and possible changes to business rates.
  3. Scrapping the cap on bankers’ bonuses, as part of a move towards post-Brexit deregulation.

Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown said: ‘’The Trussenomics agenda is all about growth, growth, growth and that’s why corporation tax cuts and a temporary cut to VAT are on the table to try and rejuvenate output and offer support to companies dealing with the cost-of-living crisis. However, the effect of this is likely to be a temporary boost to help companies through the worst of their current hardship rather than helping to lay the ground work to power growth for the longer term. There are also concerns that combined with the energy freeze cap, this slash and spend policy will make the Bank of England’s task of lowering demand in the economy and reining in inflation that much harder.

That’s not to say such measures won’t be welcomed by sectors across the board. The hospitality and leisure industry in particular has been crying out for immediate action as higher energy costs, combined with consumers tightening their belts, hit hard. There is speculation a 10% headline VAT rate for the sector could be introduced and potentially a business rate holiday. This would certainly act as a sticking plaster to stem business failures.

On a wider scale, there are some expectations that the headline VAT rate will reduce from 20% to 15% and 5.5 million smaller businesses may benefit from an additional cut. It is also thought that there may be a freeze on overall business rates ahead of a larger scale overhaul, but this has been promised for some time, with proposals repeatedly shelved, so any new announcement of a ‘plan’ is likely to receive a lukewarm reception.

Offering more firepower to financial services to lure more international business in the post-Brexit era is forecast to feature highly in Kwarteng’s speech given how crucial the sector is in powering the dominant services side of the economy. Any proposals on removing the cap on bankers’ bonuses, though, is a highly sensitive topic, given the industrial strife ripping through the public sector in particular, so this is one measure steeped in speculation which may well be kicked into the long grass.’’

2 additional measures we’d like to see for businesses

  1. Targeted tax incentives to help companies boost productivity.
  2. More detail on the energy lifeline for businesses.

Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown said: ‘’Reducing the headline rate of corporation tax is not likely to kick-start domestic company investment into automation or re-skilling. Instead, targeted tax incentives and deductions are likely to be more useful. This needs to be a bigger part of the plan to boost UK productivity to equip the  UK workforce with the skills needed in the decades ahead, particularly due to labour shortages exacerbated by Brexit.

There was an initial big sigh of relief among company bosses that finally a balm would be available to limit the impact of scorching energy bills on their businesses. But there has been a woeful lack of detail on the plan and there are concerns that the support will only be temporary, given that it will be reviewed after six months. Many businesses are still in the dark about how they will survive a pretty bleak winter ahead, with energy bills quadrupling in some cases, amid worries that consumer spending is seizing up. Providing more detail and a longer timescale on the support window will mean businesses can plan operations with more certainty instead of lurching precariously from month to month.’’