While it was right for Jeremy Hunt in his statement on Monday to cancel £32bn of the mini-budget it was wrong to end in April 2023 the energy cap price freeze. It is predicted that the energy price will now increase to £4,347 in April 2023. This is an increase of 73.9% which is much higher than the 54.2% increase of April this year which might have been the cause of the 2% increase in inflation in April. Therefore by ending the energy cap price freeze inflation might increase by 3% in April 2023. Jeremy Hunt stated that the energy cap price freeze would have reduced inflation by 5%.
If the support is only for the poorest in society then average households will have to find £2247. For someone on average earnings of £32,084 this is about 8.7% of their net earnings. Most people can’t afford to find 8.7% of their salary to pay for energy on top of the general inflation rate in the economy of over 10%. These pressures on household income even without the Bank of England increasing interest rates making them worse will lead to an economic recession possibly in the region of a 5% decline in the size of the economy.
Jeremy Hunt has talked of public spending cuts and this will have a further adverse effect on the economy. He should have gone further with the mini-budget reversals and cancelled the changes to Stamp Duty, the increase in the Annual Investment Allowance to £1 million, and the wider reforms to investment taxes which next year would have increased government revenue by £3.8bn and more after that according to government figures.
He could of course close the loopholes in the current windfall tax by ensuring it applies to super-profits accrued since October 2021; making it broader, with fewer exemptions; and scrapping carve-outs that allow oil and gas giants to offset their tax liabilities against investments they were going to make anyway. This could raise about £10bn more next year and even more in subsequent years. The government has also talked about stopping companies charging for electricity based on the cost of gas; if they do so but energy is sold at the level of the energy price cap then the government will need to receive the difference as revenue.
Perhaps he could also abolish the scrapping of the 1.25% increase to Employers’ National Insurance from 6th November and instead reduce it to 1% from April 2023. This would increase government revenue by £4bn this year and £9.5bn next year.
The most important thing he should do is reinstate the freeze of the energy price cap to run for the two years it was initially to run for (ending in October 2024). Both we and the Labour party proposed price freezes at a lower level and said we could fully fund them. If he needed more revenue to fund the energy price cap freeze he could increase Income Tax for those earning over average earnings so they would in effect be paying something towards the energy price increase. He could introduce a new level of income tax on earnings above £33,000 (just above average earnings) of 22 pence which could bring in about £2bn this year and £6bn next year. This is only an increase of three-quarters of a penny because until 6th November they would have to pay 13.25 pence national insurance and 20 pence income tax and instead afterwards they would be paying 22 pence income tax and 12 pence national insurance. He could also increase the higher rate by 3 pence to 43 which is really only a 1.75 pence increase which would raise about £1.7bn this year and £5.7bn next year. He could also increase the additional rate by 3 pence to 48 which again is only a 1.75 pence increase. This would only raise about £190 million this year and £465 million next year. The total from all three for next year would be about £12.16bn.
Someone earning £50,000 would pay £340 in a full year towards their government subsidy of over £1847. Someone earning £125,140 would pay £3,251.50 over a full year, but only £1,687.25 more than if the 1.25 National Insurance increase had not been reversed. If energy prices continue to increase into 2024 then these income tax rates could be increased further so the more people earn the more they pay in tax rather than in energy prices.
* Michael Berwick-Gooding is a Liberal Democrat member in Basingstoke and has held various party positions at local, regional and English Party level. He posts comments as Michael BG.
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5 Comments
Tory party has always been cruel, has always sought the vote of those idealising the past and willing to sacrifice the future… the big difference now is that i) the press has given up on them because they’re no longer effective managers of the circus and ii) that future can be marked by 2022 Advent Calendars rather than being years away.
“Jeremy Hunt has talked of public spending cuts and this will have a further adverse effect on the economy. ” There just isn’t anything significant left to cut.
This chaotic government now seems likely to fall in the very near future, considering the astonishing events of this afternoon. However, I suppose in the interest of trying desperately to avoid an early General Election, the leading Tories may now rapidly select another Prime Minister in place of Liz Truss but but keep Jeremy Hunt as Chancellor. If he continues we will need to press him, as Michael’s splendidly detailed article demands, to keep the energy price cap running for two years for the sake of all our beleaguered people, and take up the suggested means of helping to pay for it.
The triple lock arrangement for pensioners will also have to be funded, if Liz Truss’s sudden undermining of her Chancellor by saying in the Commons that it will stay holds firm. But more important still for us to campaign on is to insist that welfare benefits too must increase next April by the rate of inflation, not, as last April, by the then current level of held-back wage rises. With the rapid rise in the cost of basic foodstuffs as well as energy, this is going to be a hard winter financially even for people on the average wage, as Michael shows, and desperate for the poorest who will actually need help even sooner.
We really need some serious tax rises instead of this odd penny here and there. So let’s have the abolition of freedom from NI for those working over State Pension age; an unearned income surcharge equal to the standard NI rate; a raising of the rates of Capital Gains Tax to bring them into line with Income Tax+NI and an ending of the extra tax-free allowances for unearned income and capital gains. After all, if we are going to offer two years of protection against energy price rises and stop cuts we are going to need tens of £billions not just a few £billion. We owe it to the electorate to tell them the truth about what it will cost and how we will pay for it.
George Thomas,
You and I may think there is nothing to cut from government spending and that only bones are left. This does not mean that the Conservatives would not cut into the bones rather than increase taxes on their supporters.
Kathrine Pindar,
You were correct this Liz Truss government will be gone by next Friday. It is possible that our new Prime Minister (whoever it might be) will keep Jeremy Hunt as Chancellor of the Exchequer for stability and to keep the markets calm. I suppose that the triple lock arrangement for pensioners is no longer protected with Truss going. Indeed, we need to campaign that welfare benefits are increased at least by the rate of inflation (10.1%) in April.
Laurence Cox,
In my article I am suggesting adding a few pennies to some income tax rates to help pay for restoring the energy price cap freeze for its original two year length and to get those on higher than average incomes to pay something towards the higher energy prices. The energy price cap freeze was criticized for helping people who could afford the increased costs of energy hopefully by taxing these people more most of the criticism would be answered.
In the past I have supported many of your suggestions – extending National Insurance to all forms of income, increasing the National Insurance higher rate (an increase of 10%) to the lower rate (https://www.libdemvoice.org/can-we-afford-a-universal-basic-income-56572.html). It is party policy to tax capital gains and salaries through a single allowance (see our 2019 manifesto and its costings document). I also support restricting tax relief on pension contributions to the basic rate.
We don’t know how much is needed either to meet any funding gap of the energy price cap freeze or to restore government credibility. However my article sets out how to find £35.46 billion of extra government revenue than it has currently.
Sorry Katharine for the typing error with your first name.