In an attempt to calm financial markets, the new Chancellor, Jeremy Hunt, brought forward policies to “provide confidence in the government’s commitment to fiscal discipline”. The announcements were originally expected on October 31, in the Government’s medium-term fiscal plan.

The Chancellor gave a statement to the media in the morning of 17 October and made a statement to the House of Commons later in the afternoon.

The Treasury states that the announcements are “designed to ensure the UK’s economic stability and provide confidence in the government’s commitment to fiscal discipline”.

As we explain in the background below, the then Chancellor, Kwasi Kwarteng, held a mini budget on 23 September 2022. He announced tax cuts that would reduce Treasury revenues by around £45 billion in 2026/27.

Financial markets reacted negatively to the mini budget and have been turbulent since. The mini budget didn’t set out a wider plan for the public finances. A medium-term fiscal plan, along with official forecasts from the Office for Budget Responsibility (OBR), is now expected on 31 October.

Some of the mini-budget’s tax cuts had already been cancelled before Jeremy Hunt’s statement. On 3 October, the Government said that the abolition of the 45% additional rate of income tax would no longer happen. On 14 October, the Prime Minister said that the Government would “keep the increase in corporation tax that was planned by the previous government.” 

Jeremy Hunt replaced Kwasi Kwarteng as Chancellor on 14 October 2022.

What was in the 17 October statement?

Reversal of tax cuts

The new Chancellor’s statement cancels most of the tax changes that were announced in the mini budget. The Government had already cancelled measures contained in the mini-budget to abolish the 45% additional rate of income tax and freeze the main rate of corporation tax at 19%.

Of the tax changes announced in the mini-budget, all that remain are:

  • the reversal of the National Insurance contributions rates increase and cancellation of the Health and Social Care Levy
  • cuts to Stamp Duty Land Tax
  • permanently setting the Annual Investment Allowance (AIA) at £1 million from April 2023. The AIA is a capital tax allowance for certain investments in plant and machinery.
  • increases to Seed Enterprise Investment Scheme limits and reforms to Company Share Option Plan

On 14 October, when the freeze to the main rate of corporation tax was cancelled, the Treasury said that the position on the bank surcharge would be set out in the medium-term fiscal plan. The surcharge is levied on top of corporation tax. The mini-budget said that the bank surcharge would remain at 8% when the corporation tax main rate was set to remain at 19%, so that the combined rate paid on profits by banks and building societies would be 27%. With corporation tax now increasing to 25% unless the surcharge is reduced the combined rate paid on profits by banks and building societies would be 33%.

The Treasury estimate that all together the decisions taken to cancel the mini budget’s tax policies are worth around £32 billion a year for the Treasury’s revenues. 

The Chancellor’s 17 October statement means that: the basic rate of income tax will no longer be reduced from 20% to 19% in April 2023; dividends tax won’t be reduced by 1.25%-points in April 2023; reforms to off-payroll working rules will not be repealed; there won’t be a new VAT-free shopping scheme for non-UK visitors; alcohol duty rates won’t be frozen from February 2023 for a year. All of these policies had been announced in the mini budget.

Shortening of universal support for household energy bills

Announced in September 2022, the Energy Price Guarantee (EPG) caps the unit cost of energy for households. All households were due to benefit from the EGP for two years, until the Chancellor’s 17 October announcement.

In his statement, the Chancellor said that universal household support for energy bills will now run until April 2023. A Treasury-led review will be launched to consider how to support households and businesses with energy bills after April 2023. The review’s objective is to “design a new approach that will cost the taxpayer significantly less than planned whilst ensuring enough support for those in need.” Universal support for business (and other non-domestic users) was always due to end in April 2023.

Economic advisory council 

An economic advisory council is being established. The council will “act as a consultative forum for the government to be advised on UK and international economics and financial markets.”

The council will include Rupert Harrison (Blackrock and former Chief of Staff to Chancellor George Osborne),  Karen Ward (JP Morgan), Sushil Wadwhani and Gertjan Vlieghe (former members of the Monetary Policy Committee). Further members will be added in due course. 

More difficult decisions to come

The Chancellor said that there would be “more difficult decisions to take on both tax and spending”. Departments are being asked to find ways to cut their spending. More announcements are to come on 31 October, when the medium-term fiscal plan is published.

What’s the background? The mini-budget and after

The mini-budget

On 23 September 2022, the then Chancellor, Kwasi Kwarteng, presented his “mini budget” to Parliament and launched the Government’s Growth Plan 2022.

In his statement, the then Chancellor said the Government aims to have a trend rate of economic growth of 2.5% over the medium term. He said the Treasury’s growth plan was “built around three central priorities: reforming the supply-side of the economy; maintaining responsible approach to public finance; and cutting taxes to boost growth.”

The mini budget included tax cuts which would have reduced Treasury revenues by around £45 billion in 2026/27.

A medium-term fiscal plan was promised in “due course” when the Treasury would set out “a clear commitment to fiscal responsibility and reducing debt as a proportion of GDP over the medium term”. No date was set for the plan at that point.

The Office for Budget Responsibility (OBR) produce the UK’s public finances forecasts and are the public finances watchdog. The OBR did not publish economic forecasts alongside the mini budget. As the Library explained in Background to the September 2022 fiscal statement, the OBR would have been able to produce a forecast, but the then Chancellor did not request one.

The Library’s summary of the mini-budget provides a list of the main announcements.

What’s happened since the mini-budget?

Market turbulence

Financial markets reacted negatively to the mini budget. On the day, sterling fell by around 4% against the US dollar and around 2% against the Euro. Gilt yields, which indicate the interest rate at which investors will lend to the government, rose over the course of the day. 

Following a weekend in which the then Chancellor suggested more tax cuts would be on their way, gilt yields continued to increase on Monday 26 September.

Several reasons have been suggested as to why gilt yields increased following the mini budget. Global factors are making markets across the world volatile. Countries are fighting inflation and raising interest rates to do so. There is uncertainty due to factors such as Russia’s invasion of Ukraine. However, economists (including at the Bank of England and the National Institute of Economic and Social Research) largely agree there is a “UK-specific component” to the rise in UK gilt yields, some of which is due to the mini-budget. 

Mortgage providers have also substantially increased the rates at which they were willing to lend since the mini budget.

Medium term fiscal plan brought forward

As discussed above, Kwasi Kwarteng didn’t say at the mini budget when the medium-term fiscal plan would be published. On Monday 26 September the Treasury announced the plan would be published on 23 November (presented with an OBR forecast). This was subsequently brought forward to 31 October.

Tax cuts cancelled and Chancellor replaced

The mini-budget announced tax cuts which would have increased the budget deficit by £45 billion a year by 2026/27. The Government then abandoned some of these measures. Around £25 billion of tax cuts remained prior to the Chancellor’s 17 October statement. 

On 3 October 2022, the Government said that it will not be going ahead with the abolition of the 45% additional rate of income tax. Announcing the decision not to go ahead with the tax cut, the then Chancellor said that “it is clear that the abolition of the 45p tax rate has become a distraction from our overriding mission to tackle to challenges facing our economy.”

On 14 October, the Prime Minister Liz Truss, replaced the previous Chancellor, Kwasi Kwarteng, with the current Chancellor, Jeremy Hunt. The Prime Minister also said the Government would “keep the increase in corporation tax that was planned by the previous government.” The mini-budget had cancelled a planned increase in the main rate of corporation tax from 19% to 25%, in April 2023. The PM’s statement means that the rate will rise to 25% in April 2023.

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