London: Liz Truss is under pressure to row back on her September 23 “mini-budget,” the biggest package of unfunded tax cuts in more than 50 years which triggered a market sell-off and hammered her Conservatives in opinion polls.
Officials in 10 Downing Street are drafting options on how they might change course, though no final decisions have been made, according to a person familiar with the matter. Truss already dropped the most controversial part of her plan - abolishing the 45 per cent top rate of income tax - earlier this month.
On Thursday, Chancellor of the Exchequer Kwasi Kwarteng said nothing has changed and he would set out how he plans to pay for the measures on October 31. But criticism of the government is intense and events appear to have overtaken Britain’s finance minister, who cut short a trip to the US to discuss what happens next.
According to the influential Institute of Fiscal Studies, Truss and Kwarteng have a 60 billion pound ($68 billion) black hole to fill. That looks a tall order, but below are some of their options:
Increase corporation tax
Corporation tax is seen as the most likely target of a policy reversal, especially as it was one area Kwarteng did refuse to rule out reversing on Thursday. Under Boris Johnson’s administration, the levy was due to rise to 25 per cent from 19 per cent in April. Truss’s government has vowed to scrap the rise.
Newspapers including the Times reported Truss is considering raising the tax from the current 19 per cent level, but by less than the 6 percentage points planned under Johnson.
Rowing back on this pledge “may be one of the politically easiest things,” said Gemma Tetlow, chief economist at the Institute for Government think tank. “Voters seem less concerned about imposing corporation tax increases than on imposing personal tax increases.” When Kwarteng unveiled his strategy last month, the Treasury estimated it would cost an average of more than 13 billion pound a year over five years.
Reverse the income tax cut
Truss’s economic package included cutting the basic rate of income tax from 20 per cent to 19 per cent from next April, a move which if reversed, would earn the Treasury about 6 billion pound over the next five years.
The problem here is that unlike much of the chancellor’s tax package, which was widely criticized as disproportionately favoring the wealthy, this is one measure that would likely have broad electoral support if introduced.
That’s especially true as Kwarteng made no changes to tax thresholds, meaning millions of Britons actually face paying more tax under his plans.
Cut spending
Doing this could be catastrophic politically for Truss, given the strength of feeling among Tory MPs who fear it would play into the hands of the poll-leading opposition Labour Party. Truss tried to calm her party on Wednesday when she insisted she wouldn’t cut public spending.
But prior to that, she has consistently made noises about finding efficiencies and giving taxpayers value for money - Westminster code words for cuts. Last October, the government announced real-terms budget increases for departments that run until 2025 and Truss has said she will stick to those.
But she could announce much tighter budgets beyond 2025, according to Tom Pope, deputy chief economist at the Institute for Government think tank. Cutting capital spending - there are large increases planned in research and development, transport and defense in the coming years - is also an option.
Reverse smaller measures
There are other savings Truss could try to find from her tax package, but the problem is they don’t come close to the types of numbers likely to be needed to calm financial markets.
Truss’s plan to reintroduce a VAT refund on shopping for tourists, for example, is due to lose the Treasury 2 billion pound a year by 2027. She could also U-turn on changes to off-payroll working rules, which the Treasury estimated would cost 6 billion pound up to 2026-27.
The UK had also been due to cut taxes on dividends by 1.25 percentage points in April 2023, reversing a hike introduced under Johnson. If reinstated, it would be expected to raise about 4 billion pound between now and 2027.
“The problem with tweaking small areas of the tax system is it’s inevitably going to raise you less money,” the IfG’s Tetlow said. “You need to do quite a lot of small tweaks to raise serious amounts of money.”
The nuclear option
If Truss decides she can’t win a political battle over spending cuts, the prime minister may need to a pull another major lever to make the sums add up.
VAT is the big beast here, contributing about 15 per cent of the UK’s 916 billion pound tax take in 2021-22. But raising it when Britons are struggling with higher energy bills and soaring inflation heading into winter would be extremely risky.
