It would be nice to be able to say to you that 'a course has been set, and I'll speak to you after the spring statement', but I suspect that’s not going to be the case. Further policy announcements and personnel changes are sure to follow.
With a government only 40 days into its tenure with a budget almost completely dismantled within weeks of its announcement, there is no precedent for these circumstances.
What’s happened since the Mini Budget
Perhaps a quick recap would be in order. As briefly as I can:
Aimed to stimulate growth, the mini budget included a raft of tax cuts and deregulation such as the accelerated cut in basic rate of income tax, the removal of the top rate of tax, the cancellation to rises in NI, dividend and corporation tax, and the repeal of IR35. Polarising stuff already.
What really sent the markets into a wobble, was how radical and sudden the measures were, and the ambiguity around how £45bn of tax cuts was going to be paid for.
Sterling fell by 5% against the Dollar on the day itself. As the UK’s credit worthiness began to be questioned the value of Government bonds (known as GILTs) fell, causing institutional investors such as pension funds to reduce their exposure.
The Bank of England being forced to respond began buying up GILTs to prop up pensions. The Monitory Policy Committee then accelerated their increase in the base rate of interest to counter rising inflation. Those on variable rate mortgages saw their repayments rise. Lenders, finding it difficult to predict the cost of wholesale borrowing, were forced to alter or in some cases withdraw their products due to pricing uncertainty.
Government borrowing, already high due largely to economic measures rolled out during Covid, saw large increases in costs in servicing its debt.
As market volatility continued, the previous Chancellor Kwasi Kwarteng was sacked, the new Chancellor Jeremy Hunt came in, and parts of the autumn statement were rushed forward to today.
What’s been cancelled
The withdrawal of the top rate of tax was cancelled soon after the mini budget. What followed today were further cancellations of the planned cuts to dividend tax and the basic rate of income tax. The planned incremental increases in corporation tax for Companies with profits over £50k was reinstated.
Planned freezes on alcohol duty and the VAT exemption for overseas shoppers were also cancelled.
Energy Price Guarantee
This is a government subsidy which limits what suppliers can charge customers for energy bills. Initially committed to for 2 years, it has been reduced to 6 months to support people through the winter. A replacement scheme will be put in place in the spring which will be targeted rather than universal. Crucially though, it will be cheaper.
Windfall taxes on energy companies weren’t ruled out. However the dangers around ad hoc taxation on profits of a cyclical nature were repeated.
The relaxation of restrictions on banker’s performance related pay will go ahead. There is a compelling argument that this regulation didn’t work, and simply shifted what would have been paid in bonuses on to basic pay, lumbering financial institutions with huge fixed costs.
The repeal of the 2017 and 2021 IR35 reforms however will be cancelled. This will wrangle many in the flexible labour market. Few advocate the use of limited companies in cases of disguised employment, but the collateral damage caused by these reforms still impact the delivery of projects today.
Essentially what’s staying is what has already been legislated for.
The reversal of the planned increase in National Insurance Contributions (known as the health and social care levy) will go ahead. As will the changes to stamp duty thresholds.
What happens next
Things are moving very quickly and it’s difficult to predict how it will play out. There is significant political as well as economic volatility, with clear interdependencies with one another.
Today was an emergency announcement to remind the markets of our fiscal discipline. The markets have responded well today with the pound up and the cost of government borrowing down.
But the size of the U-turn and the impact it’s had on the government’s credibility can’t be ignored. Trust in those in charge is as big an influence on confidence as the numbers themselves.
The fiscal statement planned for 31 October will still go ahead. Whilst today’s announcements were around tax, expect the next one to be on spending. It will also be accompanied by an economic forecast by the Office of Budget Responsibility (OBR).
If there’s anything you feel I can advise on in light of what’s going on, please let me know.