Fire in the Brothel ??

Many analysts are pointing out that for millions of people, much of this help will effectively be swallowed up many times over by higher energy bills, the higher mortgage and borrowing costs that many have been saddled with after seven interest rate rises in a row, and the many other soaring costs that are putting household budgets under unprecedented pressure.

The FTSE 100 tumbled 2% to a three-month closing low on Friday. So far this year, the index of blue-chip companies has lost 5% – much less than European or US markets – helped by oil companies, and exporters boosted by the weak pound.

“The chancellor’s high-risk strategy could entail a larger FTSE 100 correction before the year is out,” said Charles Archer, a financial writer at online trading platform IG. As monetary policy tightens, mortgage and debt defaults rise, while investment in growth falls. This could render the mini-budget entirely ineffective.

What is the budget?

Governments require parliament’s approval to spend money, as well as to raise revenue in the form of taxes. A budget is an estimation of revenue and expenses over a specified future period of time and is utilized by governments, businesses, and individuals.

The government lays out its plans for new taxes and welfare policies, and changes to existing taxes and welfare policies, in the budget, with the chancellor giving a speech to the House of Commons. As well as setting out the government’s plans for taxes, budgets also give an overview of the general state of the UK economy.

Parliament provides its main scrutiny of spending plans through the separate ‘estimates’ process, where the government presents spending proposals for each government department for parliament’s approval.

It was billed as a mini-budget, but the raft of measures announced by the UK’s new chancellor of the exchequer is poised to bring some of the biggest changes to UK personal finances in decades.

KEY TAKEAWAYS

• Chancellor unveils new growth plan, tackling energy costs to bring down inflation, backing business, and helping households.
• Corporation tax rise cancelled, keeping it at 19% as government sets sights on 2.5% trend rate of growth.
• The basic rate of income tax cut to 19% in April 2023 – one year earlier than planned – with 31 million people getting on average ￡170 more per year.
• Stamp Duty cuts will help people on all levels of the property market and lift 200,000 homebuyers every year out of paying the tax altogether.

So what’s happening with income tax?

The basic rate of income tax is being cut by 1p in the pound from next April – a year earlier than planned – taking it down to 19%.

The Treasury said the ￡5bn-plus move would “mean 31 million people will be better off by an average of ￡170 per year” in 2023-24. However, the move benefits those on higher incomes more. On average, basic-rate taxpayers will be ￡130 better off in 2023-24, while for higher-rate taxpayers the gain is ￡360, the Treasury said.

Good Weather for the rich?

Kwarteng also announced that the top rate of income tax – the 45% “additional rate” for people earning more than ￡150,000 – is being abolished altogether with effect from April 2023 and replaced by a single higher rate of income tax of 40%. The current threshold for the higher rate of tax is ￡50,270 – from April all earnings over this amount will be taxed at 40%. Scrapping the additional rate will cut tax for about 660,000 individuals. Those who earn ￡ 500,000 a year will gain "a staggering ￡ 17,500" from abolishing the 45% rate - rising to ￡ 23,500 when you factor in the NIC reversal.

One extra perk for those who would have otherwise been additional rate taxpayers is that from April 2023 they will benefit from a personal savings allowance of ￡500, in line with higher-rate taxpayers. They were previously excluded from this.

Stamp Duty?

The plan seems to be to borrow large sums at increasingly expensive rates, put government debt on an unsustainable rising path, and hope that we get better growth. The National Institute of Economic and Social Research said that, because of the additional borrowing, a UK recession would now be shorter and shallower than was feared. But to keep inflation under control, it said the BoE would have to raise interest rates to 5 per cent and keep them there until at least 2024.

Britain’s housing market has been on a dizzying ride lately. After prices surged during the height of the pandemic, they have shown signs of softening alongside rising mortgage rates.?

To bolster the sector, Kwarteng announced that, effective immediately, he would cut the stamp duty that home buyers pay on their transactions in England and Northern Ireland. (The taxation rules there are separate from those in Wales and Scotland.) Before his announcement, buyers paid nothing on the first ￡125,000 ($138,425) of a property’s value. That threshold has been raised to ￡250,000. First-time buyers get even more relief: they now pay zero on the first ￡425,000, up from ￡300,000 previously.

Property prices are influenced by more than just taxes. Supply, mortgage rates and broader economic conditions also affect how much home buyers ultimately pay, but the measure will likely prove popular with homebuyers.?

National Insurance

British workers will take home more of their pay as early as November after the government reversed a 1.25 percentage-point rise in National Insurance taxes. That levy was introduced in April to help fund health and social care but will be canceled from Nov. 6.?

“Scrapping the National Insurance rise will put more money directly into millions of people’s pockets, which will make a positive difference in the coming months,” said Shona Lowe of investment firm Abrdn.

Benefits

Adults on benefits - such as?Universal Credit?- should expect a rise in what they receive. Universal Credit is a payment given by the government to people who don't earn a lot of money or don't have a job. The money is used to help with living costs such as bills, food, or childcare. The rise in Universal Credit is because of inflation, which is a change in the value of things - meaning things like fuel for cars and food cost more. That rise will not come until April and many charities say families need it sooner.

The pound has also reacted quite dramatically

The reaction from markets was immediate and punishing, with the pound sliding below $1.11 for the first time since 1985 and government bonds hammered over fears that the cost of the package — ￡161 billion over the next five years — would make Britain’s debt burden unmanageable. It is only fair to point out that lots of currencies have been hitting multi-year lows in recent sessions against the US dollar, most notably the Japanese yen, the South Korean won, the Indian rupee and the Australian dollar, so sterling is far from unique in this regard.

Bankers’ Bonuses

City workers had been speculating about the government potentially scrapping a cap on bankers’ bonus payments. Kwarteng delivered.

The European Union introduced a cap on bankers’ bonuses to two times their salary in the wake of the 2008 financial crisis. It was thought that the UK might ditch the rules after Brexit to lure bankers to the City, but fears of a public backlash limited the political appetite to do so.

?What happens if the government can’t pass a budget?

If a government were to be defeated on a measure that clearly affected their ability to raise vital revenue, and therefore constrained their ability to govern, a defeat on a budget could be more damaging. It would not, however, automatically bring down a government. Under the terms of the Fixed-term Parliaments Act 2011, confidence votes must be specifically worded to trigger a general election. This means that a government defeat on a budget measure – even one of major significance to a government’s financial plans – would not necessarily bring down a government, though it is likely it would face a vote of no confidence shortly afterward, as its ability to command the will of the House would be in question.

Fiscal drag might be reasonable if underhand, a strategy when growth is strong and real incomes are steadily rising, but that is not what the UK is facing. Nor can the smoke and mirrors obscure the long-term challenge for Britain’s public finances. The country is approaching the middle of its second “lost decade” of economic growth. The tax burden is rising, to the highest level since the end of the second world war, and the demands on the exchequer to spend even more on public services will not end. Britons soon or later will have to pay more tax on their barely-growing incomes. There is no disguising that fact. Few Britons will fail to notice that their wages no longer pay for what they used to.