Jeremy Hunt’s Thursday budget has provided fresh air for UK markets and the general public by opting to fill a ‘fiscal black hole’ whilst providing a delicate balance between spending & taxation.
With UK inflation rates soaring at 11.1% and government debt at £2.4 trillion, the third Chancellor of the Exchequer for 2022 has been forced to make difficult choices between give or take which exemplify what economics is all about - tradeoffs.
First on the list are the many proposals Jeremy Hunt put forward to balance the UK’s budget. For instance, to address the mass profit levels made by energy companies such as Shell & BP during the cost of living crisis, the Chancellor has chosen to adapt the Energy Profits Levy, more commonly known as the windfall tax, to address these issues. Specifically, the levy will be raised to 35% at the start of next year from 25% which is predicted to raise around £25 billion for the government. A big win for fiscal responsibility.
However, when reading the fine print one notices that the windfall taxes actually grant firms tax relief when reinvesting in gas and oil production. Although this does promote an increase in gas output, which is essential for depressing prices during the cost of living crisis, one cannot deny the environmental impact. Fortunately, it seems that Jeremy Hunt thought about this when he made his statement of committing to the Glasgow Climate Pact which demands a 68% reduction in emissions by 2030. Specifically, the windfall tax has been slightly changed significantly reducing the rate of allowance from 80% to 29% with allowance staying at 80% for decarbonisation expenditure.
In addition to this, the government has introduced a temporary tax of 45% on extraordinary profits of the gas and oil sector. In this Robin Hood style economics, the Chancellor has internalised the excess profits made by the energy companies to then redistribute these gains to the wider economy whilst attempting to balance the budget.
Furthermore, to ensure that everyone pays their fair share of tax, the Chancellor has decided to reduce the 45p income tax threshold from £150,000 to £125,000 from next April whilst also slashing capital gains allowances by half.
With respect to giving back to the economy, the Chancellor has placed focus on both the short-term and long-term. For the short term, Jeremy Hunt has stressed the importance of the cost of living crisis by offering several support packages. Households and businesses alike are to benefit from the expanded Energy Price Guarantee and £13.6 billion in support packages respectively.
To protect those most vulnerable to fuel poverty, working-age benefits will rise by 10.1% guaranteeing support for those walking the line of fuel poverty. Additionally, pension support has been offered as the Triple Lock will be retained which means pensioners will get an increase in the state pension and pension credit equal to the rate of inflation.
Those on low wages will also benefit as the National Living Wage is to rise to £10.42 from the 1st of April 2023 representing a 9.7% increase.
In the long run, Jeremy Hunt’s budget aims to boost the UK economy by focusing on three areas; healthcare, education and energy supply.
As for healthcare, the NHS is to receive an additional £8 billion in funding in 2024-2025, yet, there are doubts as to whether or not this is enough especially when considering the work countless NHS staff had to undergo during COVID, as such, staff are threatening industrial action during the Christmas period.
For education, the Chancellor has promised that schools will receive £2.3 billion of additional funding in each of 2023-24 and 2024-25 which will increase real education spending back to 2010 levels. Such investment into the education sector is designed to keep the UK’s position as one of the most innovative countries in Europe.
Finally, the UK energy market is seeing extra investment for the long-term as Jeremy Hunt has backed the construction of Sizewell C, a nuclear powerplant station in Suffolk which is estimated to have a final cost ranging between £20 to £30 billion.
All of these measures make this version of the Conservative budget much more sustainable than others but with UK GDP predicted to shrink by 1.4% in 2023 and unemployment predicted to increase to 4.9% one can only question whether this Thursday’s announcement will be enough to keep the Tories in power.