Kwasi Kwarteng will announce the details of his mini-budget on Friday with Britain already in a recession. In only his third week in the job, the chancellor is expected to announce sweeping tax cuts and further details on the government’s energy price freeze, in an emergency support package worth more than £150bn.
It comes after the Bank of England reported that Britain’s economy fell into recession earlier this year amid the cost of living crisis. Here are the five key charts that will underpin the chancellor’s statement.
Inflation has soared to the highest levels since the early 1980s in recent months, as Russia’s war in Ukraine drives up energy prices, feeding through higher costs for food and fuel for hard-pressed UK households.
The consumer prices index fell back slightly in August to 9.9%, after reaching double-digits in July for the first time since 1982.
Liz Truss’s plan to cap average household energy bills at £2,500 for the next two years is however widely expected to limit further increases in the headline rate. Some economists had expected the measure for the cost of living to reach 18% next year – or even exceed 22% if high energy prices were sustained.
The Bank of England now expects inflation to peak at close to 11%, although it has warned that the prime minister’s energy package could lead to persistently higher rates of inflation by helping to support consumer demand for goods and services.
Kwarteng has labeled his mini-budget “the growth plan” in advance of announcing broad-based tax cuts designed to help reach an annual target for GDP growth of 2.5%.
The chancellor is widely expected to scrap a planned rise in corporation tax from 19% to 25% in April, which had been set in motion by Rishi Sunak, arguing that lower rates of taxation on company profits could encourage firms to invest in Britain.
Halting the tax increase would follow years of cuts to the levy, with Britain at the bottom of the G7 league table for the headline corporation tax rate.
The move had not been a priority for business leaders, who were pushing for relief on their tax bills for capital investment. Evidence also shows corporation tax cuts since 2007 have not spurred business investment, according to the Institute for Public Policy Research thinktank.
Kwarteng confirmed on Thursday the rise in national insurance introduced by the government earlier this year would be reversed from 6 November, while scrapping the new health and social care levy – a separate tax which was due to replace the national insurance rise from April.
The tax rise had been due to raise £13bn a year to fund health and social care. The chancellor confirmed funding would however be maintained, although he did not spell out how this would be financed.
The commitment made by Truss in the Tory leadership race, a year after she and every member of her cabinet voted for the tax rise under Boris Johnson, has been criticized by charities for providing the most cost of living support to those who need it least.
The Resolution Foundation warned the poorest tenth of households would earn just £11.50 this year, while the richest would get 60 times that amount on average.
Wholesale gas price
Wholesale gas prices have fallen back in recent weeks as Russia loses ground in Ukraine and European countries make progress in filling gas storage facilities before the winter.
With Truss’s energy price guarantees for households and businesses limiting the increase for consumers, the ultimate cost for the government will depend largely on movements in wholesale markets over the coming months. However, prices are still almost double what they were a year ago.
The government’s tax cuts and energy guarantee are expected to lead to a sharp rise in public borrowing. Truss refused to consider a new windfall tax to help offset some of the costs to the exchequer.
Despite the scale of the chancellor’s tax and spending plans, the Office for Budget Responsibility, the Treasury’s economic forecaster, has not been asked to produce official estimates for the economy and the public finances.
The Institute for Fiscal Studies thinktank estimates government borrowing could still run at about £100bn a year in the mid-2020s – more than £60bn a year higher than forecast by the OBR in March – even once the energy price guarantee has expired.
With the UK’s national debt already close to 100% of GDP, at the highest levels since the 1960s, economists expect such large deficits will test the confidence of financial markets. The pound has fallen sharply in recent weeks, while the cost of UK government borrowing has risen.