On Friday the 23rd September the new Chancellor of the Exchequer, Kwasi Kwarteng, announced the UK government’s “Growth Plan Statement”, dubbed by many as the “Mini Budget”.
This was going to simply be a blog outlining the changes announced, but the reaction to the Chancellor’s statement has overtaken this somewhat and I thought it might be helpful, for those interested, to explain some of what is going on. Firstly, what was announced?
Mini Budget Headlines
- Recent 1.25% National Insurance increase for employees and employers scrapped as of Nov 2022
- Recent 1.25% increase to dividends tax scrapped as of April 2023
- Basic rate tax reduced from 20% to 19% from April 23 (brought forward a year)
- Additional Rate tax (45% on income and 38.1% dividends) on income above £150,000 has been scrapped from April 2023. Higher rate tax (40% on income and 32.5% on dividends) is now the highest rate.
- Corporation tax on company profits was due to rise to 25% for many companies from 2023. This rise has been scrapped and will stay at 19%
- Stamp Duty on residential property purchases reduced immediately
Behind the Headlines
Well, it turns out that the budget wasn’t mini at all, and the Chancellor announced the largest package of tax cuts we have seen for some time. It did follow on from the theme Liz Truss had campaigned on during the Conservative Leadership contest, so some cuts were expected. But the scale and speed took many by surprise.
The idea behind this is to help make the UK government look more competitive and encourage UK and overseas investment and boost growth.
It’s worth noting that the tax reductions are at this point unfunded, and the government will need to borrow more to cover them. This is at a time when the energy price caps are also being covered by additional borrowing, rather than a windfall tax on energy companies.
You may have noticed that the pound has reduced in value against other currencies. So why are global traders and investors selling the pound?
I don’t think it helped that the announcements came without the usual Office for Budget Responsibility (OBR) forecasts that show how this might affect areas such as growth, tax receipts and borrowing. The markets like to be kept informed and are used to the UK doing things “properly”. They certainly like to see a thorough plan when unfunded borrowing occurs.
Global investors therefore have doubts about the government plans so are selling the pound in favour of other currencies.
Although we will have more money in our pockets from paying less tax, this can keep inflation higher as we have more money to buy goods and services that have restricted supplies. Inflation can make a currency less attractive to an investor as it is worth less to them in the future.
This goes against what the Bank of England’s (BOE) have been trying to do by increasing interest rates and thus reducing the amount of money we have in our pockets. It does feel a little like the UK economic leaders are driving a car with their feet on the accelerator and brakes at the same time.
This has also led to increased costs of borrowing for the UK government due to a lack of confidence in the plans, which isn’t ideal for them.
In an attempt to manage inflation and make the pound more attractive, the BOE may look to increase interest rates further, which is great for savers but trickier for mortgage holders coming to the end of their fixed rate deals or are on tracker rates.
What does this mean for you?
It’s worth remembering that we invest our client’s portfolios on a highly diversified global basis and not solely in the UK. Although one of the up sides is that UK companies can now export more easily as the pound is cheaper, given the FTSE 100 for example consists of globally active companies, with large overseas incomes, it which could be a positive for them.
As always from us, it’s a message of patience and letting these things sort themselves out. This has certainly been the case in the past. The financial plans we create with clients are robust and designed to weather uncertainties.