“Mini” Budget Couldn’t be Less Mini if it Tried - Full Analysis

The headlines of today’s announcements keep coming, “Biggest package of tax cuts in 50 years” “New Era for UK Economy”.[1]

So let’s break this down and discern the reality of what’s been announced. People will pay less income tax, considerably so for highest earners who earn more than 150k per annum and have had the 45% additional tax rate scrapped. For the average earner in the UK who will see their basic rate of tax reduced by 1p, they will pay on average, ￡170 less tax per year. Not only will income tax be reduced but National Insurance increases will be reversed from November 6th. The Treasury states this will save people on average ￡330 per year.

The previously proposed Corporation tax increases have been binned to encourage more firms to locate and hire in UK. Bankers’ bonuses caps have been removed as it was noted the previous cap did not reduce overall remuneration but merely led to a higher salary base prior to bonus application.

Stamp duty has been overhauled, particularly for first time buyers, with measures likely to benefit those most in London and the South East (from where 65% of all stamp duty derived).

Photo Credit: Sky News

But here’s the rub, upon announcement of the above measures today the pound cataclysmically crashed below $1.11 for the first time since 1985. Government bond yields (Gilts) jumped dramatically as many international traders dumped UK assets. There are alarm bells ringing with the UK being treated more like a developing country or emerging market right now than sophisticated economy, Bloomberg reports.[2]

The FTSE 100 closed deep in red as the pound hit this 37 year low point, with markets flocking to the dollar. There are further plans to change the regulatory landscape which will be announced later in the autumn, but given today’s market reaction, this may also not be well received internationally.

What does all of the above cost?

The measures announced today will cost ￡60 billion over the six month period from October 2022 and ￡161 billion over the next 5 years. That is a massive debt pill to swallow. The hope is that economic growth will ultimately reduce this colossal debt bill, with Kwasi Kwarteng setting a target of 2.5 per cent growth per annum, which if achieved, would be a first since prior to 2008 financial crisis. This is a post Brexit world and today’s announcement shows the full might of a separate nation, unfettered by any EU laws. But will all this work?

It’s a bullish agenda and there’s no doubt some of the initiatives will be welcomed, particularly scrapping the increase in taxes and binning the previously proposed duty rates for alcohol.

Globally though, the markets do not believe in this budget. Conversely, they see it as an acceleration of the weakening pound and route into UK economic recession.

Taking in the announcements there’s a sense of foreboding. In some ways, many people feel they have been handed gifts in the form of less taxes at the time of an energy crisis. However, are these gifts laced with slow acting poison, which could ultimately kill future generations with crippling debt?

The economy has been dwindling for years and these are drastically desperate measures from a government hoping against hope the gamble pays off, with no data to support this. In the investment world, such high stakes are usually reserved only for the professional/institutional investors who can reasonably afford to take such risks and can understand them. Retail consumers have to be treated entirely differently with far more rules aimed at diluting risk and promoting risk awareness.

Kwasi and Truss are treating the country as a sophisticated investor without any suitability assessment in the form of independent forecast data demonstrating how major tax changes will impact the economy. Mr Kwarteng has promised the Office for Budget Responsibility will publish a full economic forecast before the end of the year, but by this time the measures will already largely be in place.

The last time similar measures were announced was in 1972 by then PM Ted Heath’s chancellor Anthony Barber. That budget resulted in growing inflation and ultimate recession. A former Bank of England policymaker Martin Weale believes the new Government’s economic plans will “end in tears” – even forecasting a run on the pound in events similar to those in 1976.[3]

This is an untested government attempting wholesale changes in a bid to turn the country’s economy around. I genuinely hope these measures work, that market reactions are not an indication of impending failure and we reduce our debt with compelling economic growth. Please excuse me while I light a candle to help fuel said hope!

Article by Caroline Scott, Funds and Distribution Compliance Manager in City of London.

[1] https://www.bbc.co.uk/news/uk-politics-63005302

[2] https://www.bloomberg.com/news/articles/2022-09-23/the-uk-is-really-trading-like-an-emerging-market-right-now

[3] https://www.bloomberg.com/news/articles/2022-09-22/martin-weale-says-uk-risks-run-on-the-pound-with-truss-policies