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New path for government policy

On Friday, UK Chancellor Kwasi Kwarteng unveiled a series of proposals to change the British economy in a so-called “mini-budget," that they said would stimulate growth and help those affected by the cost-of-living crisis.

The proposals were seen largely as a mixture of the new Liz Truss-led government seeking to put their own stamp on fiscal policy as well as measures to ease public fears around high electricity and heating costs as winter nears, which have dominated headlines since the Russian invasion of Ukraine.

However, on the announcement, the pound dropped against the US dollar to the lowest level since the 1980s.

The changes could see tax and investment policies for fund and asset managers change.

The plan included what the government’s press release said was a “growth plan with the biggest package of tax cuts in generations.” Key changes included the abolishment of the 45% top tax rate, a change to stamp duty on property purchases, and a cut to the basic income tax rate.

“The Chancellor today unveiled his growth plan to release the huge potential in the British economy by tackling high energy costs and inflation and delivering higher productivity and wages,” said the government’s press release. The total cost of package, including business support and energy subsidies is estimated at £60bnover the next six months.

The plans also included what was seen as a swipe at the European Union with the Chancellor announcing the canning of a cap on bankers' bonuses. "All the bonus cap did was to push up the basic salary to bankers or drive activity outside Europe,” the Chancellor said. The action could be seen as showing Truss’s intention to reaffirm the UK’s independence and trajectory in financial services, which was highlighted throughout the Brexit process.

Some of the key announcements in Kwarteng's mini-budget included:

• Changing regulations to increase investment by pension funds into UK assets, which was designed to benefit savers and boost economic growth, as well as incentivising investment into science and technology sectors.
• The basic rate of income tax will be cut to 19p in the pound from April 2023, which could affect up to 31 million people.
• The 45% higher rate of income tax is to be abolished.
• April's National Insurance increase will be reversed from 6 November, which the government said would help workers and businesses. The 1.25 percentage points increase was introduced under the previous chancellor Rishi Sunak (this had been previously announced).

Asset management community reaction

Those in the asset and fund management community were quick to give their thoughts.

“This announcement has caught investors off guard. The program set out this morning is potentially destabilising to UK government finances and could even create a run on the pound,” said Neil Mehta, Portfolio Manager, BlueBay Asset Management. “As the pound falls, the Bank of England are probably going to have to react on a falling, depreciating currency, which has an inflationary impact.”

Mehta added that tax cuts are going to have a medium-term inflationary impact, and the Bank of England would likely have to react by raising rates even further. “Markets are now pricing that the Bank of England rates are going to go up by five and a half per cent by next year,” he added. "The Bank of England will struggle to meet expectations because there comes a stage where inflation starts to choke growth and have a real impact on the consumer. [It] will need raise rates, certainly above their peers and above where the Federal Reserve and the European Central Bank are, if they want the pound to start to stabilise or appreciate." 

Others also focused on the Bank of England's possible moves on the economy. “The government is effectively aiming to create a ‘high pressure’ macro environment in the hope of spurring a growth revival, " said TS Lombard's UK economist Konstantinos Venetis. "For this to work, what is required is confidence, which is currently in short supply. A tall order, hence the violent market reaction and the reason why the Bank of England is preparing for a longer battle on inflation against the backdrop of fiscal largesse and a weak currency.”

Further reaction below, which includes predictions of dire consequences if the plan backfires.

“Overall, the tax cuts across the board from Income Tax next April to National Insurance for both employees and employers will be welcomed however its unlikely to be enough support in the situation the country and its population finds themselves in, said Rory Stuart, Wealth Planning Director at atomos. "[The] Cost of living has gone up significantly and will still likely result in a deep recession with people being largely out of pocket. The whole idea of enterprise zones run the risk of moving investment and growth out of other areas rather than creating growth. The fiscal statement, although welcomed by some will still not provide certainty for others, and this is a time where certainty is needed the most. Let’s hope this has the impact that they wish and create growth otherwise our borrowing may spiral out of control and lead to darker times ahead.”

 

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