Well the mini-budget was certainly a fiscal
event. You have probably been inundated with commentary, but we will attempt to
summarise it for you.
Globally a shift is taking place as we transition from an era of disinflation
to a world of inflation and therefore higher interest rates. At the same time
the picture is complicated by supply chains being modified to compensate for
geopolitical challenges. Central banks only really have one weapon and that is
raising rates to remove liquidity from the markets.
The government wants to stimulate growth. It has already announced the Energy
Price Guarantee (EPG), capping the unit price for households and the Energy
Bill Relief Scheme for non-domestic energy customers.
It is also trying to put more money in our back pockets with the following:
The Health and
Social Care Levy Act provided a temporary increase in National Insurance
contributions (NIC). This has been reversed and will come into effect on 6
The reduction in
income tax to 19% from 20% scheduled for April 2024 has been brought
forward to April 2023.
nil rate tax threshold (stamp duty) is increased to £250,000 from £125,000
and for first time buyers £425,000 (£625,000 max) from £300,000.
ordinary rate will be reduced back down to 7.5% and the upper rate back
down to 32.5% from April 2023.
will not rise and will stay at 19%.
The Annual Investment
Allowance (AIA) will not be reduced in April 2023.
to be established and Enterprise Investment Schemes expanded.
If you have been
affected by the change in IR35 this has also been reversed.
However, the Chancellor did not handle the announcements well. He started by dismissing the Permanent Secretary to the Treasury. The Office of Tax Simplification will be closed. He also did not ask the Office of Budget Responsibility (OBR) to review the announcements (therefore it is not really a budget) and then announced that there were ‘more cuts to come’.
The markets did not like the uncertainty and promptly sold Sterling and increased the cost of government borrowing by selling UK government bonds (gilts). This then affected the defined benefit pension industry as the cost of liability matching pensions using derivatives increased. The pension industry then needed to increase the amount of capital (margin) to pay for the increase. This created a vicious recursive circle. The Bank of England (BoE) then stepped in to prop up the gilts market.
Going forward, the BoE only increased the bank rate by 0.5% to 2.25% on 22 September 2022. The next meetings are on 3 November and 15 December. There is a high probability that rates will go up on both dates. This will of course affect mortgage rates and if you are worried give Alastair a call in the office.
It looks like the Chancellor will be trying to balance the books. Simon Clarke, the new levelling up secretary has written to Whitehall departments asking them to ‘trim the fat’ and tackle the ‘very large welfare state’.
The Government’s strategy seems to be based on ‘Reaganomics’ from the 1980s. There will be more volatility in the markets for the foreseeable future; however this is normal market mechanics adjusting to the new regime. We are coming into the Q3 earning season but our companies will be able to pass through the increase in input costs from the energy rises feeding inflation price rises.
The US consumer price index (CPI) jumped 0.9% in October, well above
consensus expectations of around 0.6%. The increase brought the year-over-year
CPI increase to 6.2%, the highest since December 1990. The U.S. Producer Price Index (PPI) also
came in up 8.6%, year-over-year.
the U.S., the latest inflation data paint a similar picture. Eurozone PPI
inflation is running at 16%. Japan’s PPI clocked in at 8%, yet another 40-year
high, and China’s at 13.5%, a level last seen in the mid-1990s. South Korea’s
import prices are rising at 35.8%, the fastest rate since 2008.
current inflation increasingly appears neither transitory nor local.
Inflation in the UK jumped to 3.2% in August from 2%, its highest level in more than nine years. The Office for National Statistics said that much of the spike was due to a substantial drop in restaurant and café prices last year and meaningful increases this year. The RPI which includes housing costs also jumped to 4.8% from 3.8%.
The US Senate passed a roughly USD 1 trillion bipartisan infrastructure package, including about USD 550 billion in new spending. This is aimed at rebuilding traditional transportation infrastructure, improve access to broadband internet in rural areas and upgrade the electric grid and water systems. The Senate Democrats also approved a USD 3.5 trillion budget resolution.
China released a five-year blueprint calling for increased regulation affecting key parts of the economy. The document signalled Beijing’s intention to draft new laws covering national security, technology, monopolies and education. In the technology sector, new legislation will cover areas such as online finance, artificial intelligence, big data and cloud computing.
The European Central Bank (ECB) revised its forward guidance, indicating it would keep interest rates “at their present or lower levels until it sees inflation reaching 2% well ahead of the end of its projection horizon and durably for the rest of the projection horizon, and it judges that realised progress in underlying inflation is sufficiently advanced to be consistent with inflation stabilising at 2% over the medium term.” The ECB indicated that this process could involve a short period in which inflation goes moderately above this target.
Last month America’s consumer prices inflation rate rose to 4.2% from 2.6% and this is before the full effects of the Biden stimulus plans take affect. Eurozone inflation accelerated to1.6% year-on-year in April, up from 1.3% in March, following a sharp rise in the cost of energy compared to the height of the pandemic. UK annual inflation meanwhile more than doubled in April to 1.5% from 0.7% in March, although both remain below central bank target rates of 2% for now.
The Senate finally passed a budget resolution moving forward legislation authorising the $1.9 trillion stimulus the President requested. This takes the amount of the global stimulus to above $22 trillion.