John Healey’s first budget as chancellor will include the first of a package of “deep reforms” aimed at lowering British energy costs towards the European average, The Observer can reveal.
In addition to short-term measures to provide households and businesses with a “breather”, the government will pursue longer-term reforms to tackle what is seen as a key structural weakness of the UK economy.
Options available include new measures to delink gas and electricity prices. Under the current system, gas sets the wholesale electricity price whenever it is needed alongside wind, solar and nuclear, and many renewable generators are paid gas-linked prices. Renewable energy owners could be paid to exit their contracts early.
Another option would be to revisit the possibility of electricity prices that vary across regions, a reform previously rejected by Ed Miliband. The chancellor could also look at removing renewable obligations from industrial electricity prices.
Healey told The Observer that he had left the IMF’s meetings in Bangkok gratified that the UK is “not in the eye of the bond market storm”. He said that against a volatile backdrop, now is not the moment for any “major moves on taxation or spending”. Instead, the priority is to “reinforce the economy’s resilience” and avoid anything that could arrest the economy’s encouraging recent momentum.
This approach is likely to include allowing the “buffer” against the fiscal rules to shrink, to absorb the impacts of the US-Iran war.
When Rachel Reeves presented her spring statement in March, the Office for Budget Responsibility (OBR) projected that the government would meet its borrowing rule, which requires all non-investment spending to be funded out of tax revenues in 2029–30, by a margin of £24bn.
The chancellor indicated that he would be comfortable with a smaller buffer, explaining that the idea is to “to use it when you need it, and rebuild it when you can”.
In March, the target year of 2029–30 represented the fourth year of the forecast period. Now, having entered a new financial year, it represents the third year of the period, which is also expected to be used by the chancellor as justification for operating with a smaller headline buffer against the rules.
The budget will announce higher borrowing to expand the financial resources available to institutions such as the National Wealth Fund and British Business Bank, known as public financial institutions or “PuFins”. The Financial Times reported that the chancellor will provide £20bn of additional capital over five years, to enable more lending to businesses and greater investments in infrastructure, including clean energy. This activity creates a financial asset for the government, which means that it doesn’t count towards the government’s debt rule.
The Centre for Policy Studies, a right-leaning thinktank, criticised the government’s increasing use of PuFins last week, describing them as “smoke and mirrors accounting” and comparing them to the previous Labour government’s use of the Private Finance Initiative (PFI).
Decisions on public spending totals for future years will not be made at this budget. The key decisions will be made instead at the government’s 10-year plan, expected before Christmas, and at next year’s spending review, the date for which has not been set.
Healey said these events would see “reprioritisation, driven by political choices rather than budgetary considerations”, but that this week’s statement would provide some indication of where the prime minister and chancellor’s priorities lie.
The budget is expected to include measures aimed at the business community, with signs that entrepreneurs will be picked out for special attention.
On 13 October, Andy Burnham held two receptions for businesses at No 10. One event was for entrepreneurs and venture capitalists, the other for bosses of FTSE companies.
“The machine had set up for a load of CEOs to go in, and Andy chose to hang out with the entrepreneurs rather than the CEOs,” said one adviser who attended. “He only popped in to see them – the big name CEOs – for a very brief period.”
The Treasury pre-trailed cuts to “pointless paperwork” and “red tape”, which it claims will save businesses up to £800m. These would do nothing to address founders’ concerns about their ability to raise capital, scale businesses and exit.
Treasury sources indicated a hike to capital gains tax is off the table, and that there could even be an expansion of some reliefs. One option understood to have been considered is “repeat entrepreneur relief”, which would provide tax relief post-sale if founders reinvest the proceeds in a new UK venture.
Another would be a “unicorn relief” that gives a lower rate of capital gains tax to founders whose UK company goes on to be sold at a valuation of $1bn or more. Currently, Business Asset Disposal relief – referred to knowingly as “BAD relief” by tax experts – provides a reduced rate on the first £1m of entrepreneurs’ lifetime gains, meaning it is poorly targeted at the founders who build the highest-value businesses.
The Telegraph reported that BAD relief would be scaled back significantly to fund other reforms.
Entrepreneurs are hopeful. “The Treasury has passed on the message that we will be grateful,” said one source in the founder community.
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