(Bloomberg) -- With expectations of tax cuts and sweeping deregulation, businesses are likely to be a big beneficiary of Kwasi Kwarteng’s mini-budget on Friday.
That prospect is leaving even some in the City of London uneasy.
“I’d love to see corporation tax come down, everyone would, but we have to remember we have a massive debt here that has to be repaid at some point,” said Alasdair Haynes, chief executive officer and founder of stock platform Aquis Exchange Ltd.
For now, there’s little sign of such concern in Westminster. Prime Minister Liz Truss has flagged an “unashamedly pro-business” agenda and Chancellor of the Exchequer Kwarteng has already announced he’s scrapping planned increases in taxes on dividends and worker pay. Throwing out next year’s planned corporation tax rise has also been widely touted.
“We will turn the vicious cycle of stagnation into a virtuous cycle of growth,” Kwarteng said in a statement emailed late Thursday by the Treasury. “We will be bold and unashamed in pursuing growth -- even where that means taking difficult decisions.”
Kwarteng’s package will contain more than 30 measures designed to stimulate growth, drive down inflation and accelerate infrastructure projects, the Treasury said in the statement. It includes plans to set up “investment zones” nationwide with targeted tax breaks and relaxed planning restrictions for business.
“The Conservatives don’t have a new plan for economic growth,” Pat McFadden, the Labour Party’s Shadow Chief Secretary to the Treasury, said in a statement in response to the announcement. “They have simply moved from levelling up to trickle down and that has not worked in the past.”
Two-Year Gap
The possibility of further announcements Friday is heightened by the two-year gap until the next general election. The tight timeframe means Kwarteng could announce a string of changes on tax immediately, followed by more detailed measures for some areas such as financial services in the next few months.
“The area where the mini-budget can have the most impact is around tax competitiveness. That sends a really rapid message,” said Miles Celic, chief executive officer of TheCityUK, a lobby group for financial and professional services firms. “The government has less than two years to a general election, it doesn’t have that much parliamentary time and regulatory changes can take time to have a direct economic impact.”
Kwarteng is expected to reiterate the new administration’s commitment to cutting the financial burden on individuals and businesses as a way to expand the economy, despite the heavy cost of its energy support package and the UK’s deteriorating budget deficit.
His mini-budget will affirm plans to scrap EU rules and aims to shift thinking across the government and regulatory world toward promoting competitiveness. Kwarteng is expected to give more details about how the government’s multi-billion pound energy cap package will be paid for, as well as stressing the need for the country to generate its own energy through fracking and North Sea drilling.
Investment Boost
The creation of investment zones follows through on a pledge by Truss during her leadership campaign over the summer. The Treasury said some 38 areas are in the running to be designated, in a bid to lift regional growth.
The new zones will offer “generous, targeted and time-limited tax cuts for businesses,” as well as “liberalised planning rules to release more land for housing and commercial development,” the Treasury said.
Measures in those zones could then be rolled out more widely. “The investment zones could be areas where the government tests certain policies to get the data. If they work, they could be rolled out nationally,” said Kay Swinburne, vice chair of financial services at KPMG UK.
So-called freeports that were announced by the government last year may be given the chance to convert to investment zones, according to the Treasury.
Freeports allow materials to be imported tariff-free, or with lower tariffs, where they can they be used to make products that can be exported, again without high tariffs. However, proponents believe they need to offer more incentives through tax cuts or the relaxation of rules.
Finance Plans
The UK’s finance industry could also be in focus Friday. Kwarteng has told senior City figures that he wanted to create a “Big Bang 2” of deregulation to unleash the potential of the City of London. But he has attracted criticism in recent days for his plans to scrap a cap on bankers’ bonuses introduced by the European Union after the financial crisis.
Firms have not backed the move in public, but have privately said it could help make remuneration more flexible and attract jobs to London, people familiar have said. There has also been lobbying to the new government to cut the levy on banks’ balance sheets and to stick to plans to shrink the surcharge on their profits, or even reduce it further.
Those changes will cost “political capital,” according to Rebecca Park, senior practice director for financial services at consultancy Global Counsel. That might mean other issues are overlooked, such as the long lead times for firms to secure regulatory approvals to do new business.
The government could take the opportunity to take a broad look at complex regulatory rules that have built up since the 2007 to 2009 crash, Park said. “One option in the coming weeks is a more fundamental review of the regulatory framework which is less post-Brexit and more post-financial crisis. This could look at ring-fencing and MREL and have a broad approach to regulation in the UK and the appetite for risk,” she said.
Amid the plans to deregulate, UK businesses have welcomed the measures announced so far by the Truss government to support vulnerable people and businesses through the cost of living crisis to ward off suffering and to protect small businesses that might otherwise go under.
For Aquis CEO Haynes, more needs to be done.
“I’m hopeful we’ll see change in the way Kwarteng looks at helping people who really need it,” he said. “That’s important to the City because banks and insurers need these people for paying their debts and when they are borrowing.”
(Adds details of Thursday’s Treasury statement throughout.)
©2022 Bloomberg L.P.
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