We hope your 2023 has got off to a good start. 

The early data suggests that the economic situation continues to look brighter than it did for much of last year.

The UK inflation rate eased in December from 10.7% to 10.5% with lower prices for petrol and clothing pushing down the headline rate.

While most experts expect that inflation will continue to fall to a level nearer 5% by the end of 2023, the immediate continued upward pressure means that the financial markets anticipate the Bank of England raising its main interest rate to 4% later this week.

There was also some positive news coming out of the United States where the country’s economy expanded by 2.9% from October to December, ending 2022 with momentum despite the pressure of high interest rates and the ongoing expectation of a recession.

The financial markets have similarly been kinder of late, although you would typically expect to see a bounce back in this area ahead of any sustained economic recovery.

In terms of the UK economy, the next important date in the diary is Chancellor Jeremy Hunt’s Budget which will take place on March 15 and will be accompanied by a forecast from the Office for Budget Responsibility.

The expectation is that Hunt will deliver a slimmed down Budget after the drama leading up to November’s Autumn Statement and the ensuing tax rises and spending cuts in a bid for stability and reassurance. 

The economic climate, while showing some small signs of moving in the right direction, provides the Chancellor with few if any opportunities to pull rabbits out of the hat. 

The Government will instead be hoping to buy itself more time to demonstrate a sustained economic recovery before it hopes to be able to offer some tax giveaways in the 2024 Budget which is likely to come in the final stages of the run-up to the next General Election.

In terms of immediate client opportunities as we head towards the end of the financial year, please do consider pension contributions and ISA allowances and any capital gains that can be realised before the tax allowance is cut from the current level of £12,300 to £6,000 in April 2023 and £3,000 from April 2024.

As ever, please do get in touch with the team at Phillip Bates & Co Financial Services if you would like to speak to us about these or any other matters. Similarly, as many clients know, we are always happy to arrange meetings with any family members or friends who would like to take some financial guidance.

Like all smart politicians, Chancellor Jeremy Hunt talked up the need for Britons to “face into the storm” ahead of presenting his Autumn Statement.

But while some sections of society will have to play their part by paying more in taxes, the statement was nowhere near as painful as some commentators had been forecasting it might be.

A lot of the tougher decisions were delayed with scheduled public spending being maintained until 2025 and increases for the NHS and schools. Defence spending is maintained at 2% of national income.

State pension payments and means-tested and disability benefits will increase by 10.1% in line with inflation. The much talked about pensions “triple lock” is therefore protected.

There was, of course, some pain meted out with the tax-free allowance for dividends being reduced from £2,000 to £1,000 next year and £500 the year after. This is a body blow to business owners working hard to weather the current challenging conditions and will raise the question as to whether dividends rather than salary remains the most tax-efficient route.

Capital gains tax allowance will be cut from the current level of £12,300 to £6,000 next year and £3,000 from April 2024.

As you would expect, we will be working closely with clients who are impacted by the above reductions. In the case of CGT, it will be important to use allowances this year if appropriate and, going forward, we will consider alternative measures that will assist with tax planning.

While, the coming winter will undoubtedly be tough for many, particularly those living on a tight budget, the approach taken by the Chancellor in his statement will, one hopes, ensure that any recession is shorter-lived than had perhaps been previously forecast.

The Office for Budget Responsibility (OBR) said the UK economy would shrink by 2% over the totality of a recession, which started earlier this year and is expected to last just over 12 months.

Both inflation and interest rates look like they may be topping out before the end of this year.

There was a generally benign reaction from the markets to the Chancellor’s 53-minute statement, providing further evidence that they are reassured by the steady and sensible approach now in place, compared to the chaotic few weeks of early Autumn.

What is less clear is the longer-term plan for growth outside of a couple of eye-catching announcements around infrastructure and the go-ahead for the Sizewell C nuclear power station.

Depending on how the next couple of years go, this may not be the concern of a Conservative government with a General Election having to be held by January 2025 at the latest.

For our clients, the reaction to the Chancellor’s Autumn Statement should provide reassurance, but it is important to remember that investments are not focussed solely on the UK, but across the world.

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.

The sooner the Conservative leadership race is concluded, the better. 

In the current economic climate, the last thing the UK needs is a caretaker Prime Minister managing the shop, and with no authority to take decisions on the pressing issues of the day, most notably the continuing cost of living and energy crisis.

We now know that the new PM will not take office until after September 5^th – seven weeks of further delay UK consumers and businesses can ill afford.

In the United States, there is always a lot of emphasis placed on the ‘First 100 Days’ of a new President’s term in office, but whoever the new PM is in the UK will also have to hit the ground running and ensure that a robust economic plan is ready to be implemented as quickly as possible. 

This may even necessitate an emergency Budget, sooner than the planned Budget scheduled for November.

Looking at the wider global picture, since my last newsletter, the markets have largely stabilised. We must remain watchful regarding inflationary pressures, but I am hopeful that we are nearing the peak globally. There also continue to be supply issues which have not been fully resolved.

The sell-off of pretty much anything other than so-called ‘old school’ stocks such as utilities and banks has ended and there is now a more balanced economic picture.

Interestingly, the S&P 500 Index in the United States has just endured its worst six months on record, but a closer look at its performance over the last 12 months shows a 3% uplift – something most investors would be comfortable with.

So, while there is reason for cautious optimism, the continuing uncertainties in the UK and worldwide reinforce the importance of having a long-term, well-balanced and, crucially, diversified portfolio, something that is integral to the advice and services provided to our clients.

Best Wishes to Laura

We would like to take this opportunity to send our best wishes to our paraplanner colleague Laura Rees who is temporarily leaving us to have a baby. 

We are also delighted that our new administrator Chris Archer is settling in well and getting to know our clients.

Finally, as we bask in a rare UK heatwave, on behalf of everyone at Phillip Bates & Co Financial Services, I would like to wish you all a lovely summer.

It has been an interesting few days for followers of the cryptocurrency market with panic selling as the market took a battering.

At one point, the Bitcoin digital currency had fallen below $26,000 from a peak of more than $69,000. Meanwhile, the Terra [LUNA] cryptocurrency fell by more than 99%, wiping out the fortunes of many crypto investors.

Terra, which was ranked among the ten most valuable cryptocurrencies, dropped below $1 at one stage last week, having peaked close to $120 in the previous month.

Although we are not permitted to recommend cryptocurrencies to our clients, it is something we are often asked about. 

We prefer to focus on the real economy where stocks may be overvalued but are never worthless – unlike the world of cryptocurrency.