When is a budget not a budget?..
..when it’s an announcement

As our new Chancellor, Kwasi Kwarteng has just announced his new growth plans, alongside the largest package of tax cuts seen for generations. This has caused, what he referred to as, “a little turbulence in the markets”. Given this gross misrepresentation of the result of his actions, I thought it might me a good time to examine some of the highlights from his announcement and what they could mean; and why you’re in safe hands with Bridgewater’s evidence based approach to investments.

So why has the Chancellor done what he’s done – and why are the markets reacting?

To be perfectly fair to the Government, they had little choice other than to alleviate the impact that the cost of energy crisis has caused for UK consumers.

The problems have occurred as the Government has implemented inflationary measures, such as cutting taxes across the board, in the hope to stimulate growth in the economy. The Bank of England has had no choice but to respond in the only way it can, by raising interest rates, as it attempts to keep inflation at the target of 2%.

All of this puts the Government’s fiscal policy in direct conflict with the Bank of England’s monetary policy. Hence the consternation of the markets. In essence Truss and Kwarteng have demonstrated a significant level of economic illiteracy; and the markets will continue to punish the UK economy until the effects of these are undone – whether the government likes it or not.

Politically the government has another big problem too, with the tax cuts for the rich being funded by benefit cuts for the poor. So even if this unusual approach of trickledown economics could ever hope to be financially justified, they are still manifestly poor policies in terms of fairness and levelling-up.

Add to this the fact that the Government didn’t run any of this past the Office of Budget Responsibility, meaning that they were therefore unable to explain how any of these proposals have been properly costed. All of which has resulted in a perfect fiscal storm and carnage in the markets, resulting in the tanking of the economy and the UK being left in an unprecedented mess.

So what’s the substance of the announcement?

• 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. With the top rate cut to 40%
• Stamp Duty cuts will boost all levels of the property market and lift 200,000 homebuyers every year out of paying the tax altogether.
• Corporation tax rise cancelled, keeping it at 19% (lowest in G20) as government sets sights on 2.5% trend rate of growth.

So what could all these ambitious plans mean for us?

Below is a summary of the highlights of the Chancellor’s announcement. Although, with unprecedented U-turn and growing decent within the Tory Party, it maybe that there will be other close-following ‘announcements’ as markets respond. However, we are where we are right now and this is what we know today:

Personal Tax

Mr Kwarteng drove home one of the core principles he believes in; namely that people should be allowed to keep more of what they earn. With that in mind, he announced a 1p cut to the basic rate of income tax, bringing that cut forward one year earlier than originally planned. Stating that this intervention would incentivise work and enterprise.

Meaning that, as of April 2023, the basic rate of income tax will be cut to 19%. The Chancellor claimed that this would benefit 31 million people, who will now better off by an average of £170 per year.

Alongside this cut to the basic rate of income tax, the Chancellor also removed the additional rate of tax. Replacing it with a single higher rate of income tax of 40%. In a move designed to encourage the best and the brightest to the UK, this has now been completely scrapped in one of the fastest political U-turns in history.

Energy Costs

Creating headlines and misery around the world, and driving up domestic and international inflation, the spiraling cost of energy understandably featured in the Chancellor’s announcement

In order to help alleviate domestic fuel bills, the Government’s Energy Price Guarantee is forecast to save a typical household £1,000 a year on energy bills. With the Energy Bill Relief Scheme set to half the cost of business energy bills. It’s the Chancellors prediction that these combined interventions should bring peak inflation down by about 5 percentage points.

Pension Fund Investment

The Chancellor also announced new measures that he hopes will unlock private investment. By making changes in regulations designed to increase investment by pension funds into UK assets. His thinking behind this is that it should benefit savers and boost economic growth, as well as incentivising investment into Britain’s science and tech companies.

Business Tax

With an intervention he hopes will encourage investment, boost productivity and create jobs; the Chancellor also announced major tax reforms that will allow businesses to keep more of their own money.

Amongst the new measures is a cancelling of the planned rise in corporation tax. This will ensure it remains the lowest rate in the G20 at 19%. In a move he claims will save 920,000 businesses almost £10,000 on average next year, Mr Kwarteng is also reversing the 1.25 percentage point rise in National Insurance contributions.

Alongside these tax interventions, the Chancellor announced further relief for businesses, by making the Annual Investment Allowance of £1 million (giving100% tax relief to businesses on their plant and machinery investments) a permanent feature, rather than letting it return to £200,000 in March 2023.

House Purchases

The Chancellor also set out a major package of cuts to Stamp Duty Land Tax (SDLT).

The nil rate SDLT band will double from £125,000 to £250,000. Mr Kwarteng claims that this should enable a further 200,000 people every year to buy their home without paying any Stamp Duty.

As of midnight on Friday 23 Sept 2022, if you’re a first time buyer, then you will pay no stamp duty up to £425,000, along with increasing the value of the property on which first time buyers can claim relief, from £500,000 to £625,000.

Good news for Bridgewater’s Clients

Despite the chaos in the markets created by the Chancellors Announcement. I feel that it’s important to remind everyone that all of Bridgewater’s portfolios are managed inline with our evidence-based approach to investment. At the core of this is that we have adopted a global market cap approach. This is an important point to remember, as this means that the UK stock market only constitutes about 4% of the global value of all shares.

This means that our portfolios are largely insulated from the ‘antics’ of the UK government. In addition to this, since many of the underlying investment are denominated in US Dollars, the portfolios, which are priced in Sterling, have also benefitted from the strength of the US Dollar.

We’re here whenever your need us

As always, were here to help with independent and expert financial advice. If you have any questions regarding the Chancellor’s announcement, or any other aspect of your finances, then please get in touch with us at Bridgewater Financial Services; where we will be delighted to help guide you through your individual options and strategies.