Orthodoxy returns: UK takes its medicine

19 October 2022

By Antonio Risorto, from Barclays Private Bank

Please note: The article does not constitute advice or any form of recommendation. Barclays Private Bank does not offer tax advice, and professional advice should always be sought.

It was almost a month to the day when we published our initial reflections on the budget, in a piece entitled: UK ‘mini’ budget: Brave new world? Unfortunately, the subsequent four weeks have witnessed financial market chaos and reputational damage for the UK.

In many ways, it couldn’t have gone worse for the new government.  Rather than introducing a ‘brave new world’, we instead witnessed a ‘brief new world’. And a messy one at that.

In the following article, we provide a short update on the latest round of Treasury U-turns. We’ll write again at the end of the month about the much-anticipated Office for Budget Responsibility (OBR) forecast on 31 October.

Where did it all go wrong?

Kwasi Kwarteng’s mini budget was supposed to usher in a new era of low taxation and high growth, but instead triggered a tidal wave of investor panic.

The initial policy response wasn’t too bad, even if questions were being asked as to how the tax cuts would truly be funded. However, and as we said in our separate article – A perfect storm hits the UK –  the flames of uncertainty were fanned when Mr Kwarteng casually promised even more tax cuts. Suddenly, the UK’s radical new fiscal policy was under massive scrutiny and investors didn’t like the lack of funding clarity.

Running parallel with this, was the uncomfortable dynamic emerging between two institutions integral to the health of the UK economy – the government, and the Bank of England (BoE). While the politicians wanted to put more money into people’s pockets (potentially fuelling inflation), the monetary policymakers were straining to cool inflation. They were pulling in different directions and the tension was palpable.  

Screeching U-turns

The severe allergic reaction to the mini budget by financial markets, ultimately cost Mr Kwarteng his job and his replacement in Mr Hunt, becomes the UK’s fourth Chancellor in as many months. It is a stunning turn of events for a country widely revered for its long-term stability. 

Against a backdrop of soaring borrowing costs, a plunging sterling and an emergency intervention by the BoE to prop up the gilt market, Mr Hunt was recruited in a desperate attempt to calm panic-stricken financial markets. The Prime Minister will be hoping that her second Chancellor quickly becomes synonymous with fiscal responsibility and is seen as a safe pair of hands at the wheel.

Amongst other things, the most recent U-turns mean that the following areas which we first commented on in the aftermath of the mini budget, now look like this:

1. Income tax, National Insurance and energy bills

Having initially vowed to cut the basic rate of income tax to 19p (from 20p), which would have brought forward an existing policy to April 2023 (from April 2024), the government has now decided to scrap the tax cut altogether. It had already conceded that scrapping the additional rate of income tax (45p) was sufficiently unpopular to merit its withdrawal. The dividend tax cut unveiled in Mr Kwarteng’s mini budget has also been scrapped.

Meanwhile, the new energy support bill took a big hit in the first few days of Mr Hunt’s role. After offering to support households for two years, the government now feels the need to reign it in. The new proposal is for 6 months’ support, with a further review in April 2023.

A rare survivor from the now-infamous mini budget is the decision to cancel a 1.25% increase in National Insurance. That decision still stands, primarily because it had progressed too far in Parliament to be rescinded at this stage

2. Stamp Duty Land Tax

First time buyers may also be breathing a sigh of relief, as the decision to cut Stamp Duty Land Tax (SDLT) hasn’t been withdrawn.

As a reminder, it means that no SDLT is due on the first £250,000 of a property’s purchase price, removing the 2% levy that was previously applied between £125,001 and £250,000 of a purchase price (but it only applies to first time buyers, and those not subject to overseas or second home surcharges).

3. Corporation tax

One of the biggest and most symbolic U-turns involves corporation tax.

The Prime Minister originally wanted to cut it in an effort to make the UK more attractive to investors. Ironically, the investor angst caused by the budget was so significant, that Mr Hunt decided to repeal the cut in an effort to plug the hole in public finances (and to stem the souring investor sentiment).

It is a big blow to the ideology of low tax and high growth that underpinned the mini budget.

Where next?

Given the pace and depth of change in UK politics at the moment, it is hard to say with conviction what might happen next. From an investor perspective, it’s always worth remembering that short-term events should not distract from long-term strategies.

All eyes will be on Mr Hunt when he announces additional fiscal policy changes on the 31 October. His predecessor had brought forward the date of this OBR forecast in an attempt to reassure markets that the numbers added up. Unfortunately for him, it wasn’t soon enough to save him from being unceremoniously sacked.

His replacement, and the wider government, will be hoping the OBR forecast restores some credibility. The fact that its publication date coincides with Halloween will not be lost on spooked investors. 

In the meantime, you can read our latest article which looks at long-term wealth planning through the eyes of three ‘buckets’. It’s entitled: Life goals? Liquidity, lifestyle and legacy.

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