The Government may not have called Friday’s ‘fiscal event’ a Budget, but it certainly packed more of a punch than many Budgets put together.
In just over 25 minutes on his feet, new Chancellor Kwasi Kwarteng took the biggest economic and political gamble in 50 years – the last time there was a tax cutting event of a similar scale.
The key measures announced were:
- The scrapping of the 45% top rate of income tax for those earning more than £150,000.
- A 1p in the pound cut to the basic rate of income tax brought forward to 2023.
- A 1.25% increase in National Insurance contributions will be cancelled from November.
- The stamp duty threshold rises from £125,000 to £250,000 and for first time buyers the threshold rises to £425,000.
- The rise in corporation tax from 19% to 25% next April has been scrapped.
- Annual investment allowance, the amount companies can invest tax free, remains at £1m indefinitely.
- The cap of bankers’ bonuses has been scrapped.
- Investment zones in 38 local areas under discussion.
- Tax cuts and liberalised planning rules to be offered to release land for housing and commercial use.
The slew of tax-cutting and tax cancelling measures outlined by the Chancellor follows the announcement a few days earlier of the energy package for consumers and businesses which could end up costing the taxpayer in the region of £150billion.
While some of the Chancellor’s actions, such as those on infrastructure and housing, make sense, there is a lot that has left many people at best baffled and at worst seriously troubled. Measures such as reducing the 45% top rate of tax and the removal of the bankers’ bonus cap do not seem to be those of a responsible government with a steady hand on the tiller.
The consequence of Friday’s ‘fiscal event’ is that interest rates will continue to be hiked up beyond the 0.5% rise announced by the Bank of England on Thursday.
It is likely that a further rise of 0.5-0.75% can be expected over the coming months. For many households the resulting increased mortgage payments will take away any gains from other measures contained in the Chancellor’s statement.
Only time will tell whether the decision to embark on a tax-cutting spree has worked. With the next General Election two years away at most, it does feel like new Prime Minister Liz Truss and her Cabinet have decided that a bold gamble of such a scale gives them the best shot at re-election.
Should the gamble fail, and Labour wins the next election, the party’s leader Keir Starmer has already started to make clear that many of the measures would be overturned.
The initial reaction of the markets to the Chancellor’s statement was not favourable with sterling falling to its lowest level against the US dollar in 37 years. Bonds and equities also fell sharply.
Interviews over the weekend suggest that Liz Truss and Kwasi Kwarteng remain emboldened and plan to continue pursuing an aggressive tax-cutting agenda over the coming months.
The great concern, though, is that the UK is now set on an irreversible path of ‘boom and bust’.
We must all hope that this proves not to be the case, but what the events of the last few days do demonstrate is the importance of our clients having sensible, balanced, long-term financial plans with a global rather than UK-centric approach.