This morning’s statement from Chancellor Kwasi Kwarteng has certainly got plenty for wealth managers to consider following the revelations of the Government’s plan for economic growth to boost the UK economy with Kwarteng’s aim of making us a “nation entrepreneurs”. With a huge package of tax cuts, tax incentives and reversal of previous measures all now introduced, the likes of which we’ve not seen in the UK for decades, wealth managers will be crunching the numbers and working out how this huge package will impact investment decisions going forwards.
Initial comments from experts across the wealth management and investment community are coming in to us at Wealth DFM so here are some of their thoughts:
Chris Cummings, Chief Executive of the Investment Association said: “Investment managers support the government’s ambition to boost long-term growth and international competitiveness, and to help businesses and savers weather the difficult economic environment.
“Measures which unlock new investment opportunities help provide for the financial futures of UK households, as well as offering additional investment for UK businesses and the broader economy. We specifically welcome the pensions charge cap reforms, which will enable investment into a wider range of assets, such as infrastructure projects and property. Initiatives to boost investment in science and technology firms will also help support innovation and growth.
“We look forward to working with the government as it reviews this regulation, and on the wider package of measures to unleash the potential the UK financial services sector expected this autumn.”
According to Quentin Fitzsimmons, portfolio manager of the T. Rowe Price Global Aggregate Bond strategy, investor credibility in the UK has been ‘rapidly eroded’: “The government’s strategy is to go for broke – with the gilt market and sterling the easiest casualties to take in order to achieve this goal. The true cost of this massive borrow-to-spend binge is likely be high. Possibly very high.
“Successive UK governments dragged the gilt market into a modern world of institutional transparency, reinforced by the fashionable orthodoxy of inflation targeting and an independent central bank. These gains, valued by investors, have been rapidly eroded. As the old saying goes, ‘it takes forever to gain credibility, which can also be lost in an instant’.
“For all the excitement of a dash for growth, the UK economy has a lamentable capacity to hang onto such engineered gains. Sterling and the gilt market have very long memories, including a latent form of post-traumatic stress, which may have been triggered.”
Rob Morgan, Chief Investment Analyst at Charles Stanley says: “There is a startling lack of nuance or targeting in this mini-budget; energy, tax, and investment have been solved with simple sweeping measures. A prime example of this is income tax. A planned 1p income tax cut has been brought forward by a year, to 2023, and the additional rate of income tax of 45% is to be scrapped. Whilst the 1p cut might help some consumers meet the rising costs over the coming months, high earners will feel most benefit. Others will likely feel left out in the cold.”
Paul Craig, portfolio manager at Quilter is taking a “wait and see” stance as he comments:
“Well, you certainly have to commend the new chancellor for having the courage of conviction on his first day in school, but whether government’s energy subsidies, tax cuts, etc. will pre-empt economic growth or prove inflationary will largely depend on how these incentives are financed. The Bank of England (BoE) is likely to provide at least part of this funding, implying a first-round boost to broad money. This could prove inflationary and therefore require offsetting BoE action, and for consumers with borrowings they could simply loose from one hand that they receive in the other. That said, monetary growth may be offset by planned BoE quantitative tightening, a slowdown in mortgage lending and external outflows (expanding balance of payments deficit).
“A sensible approach would be for the BoE to wait to assess the monetary consequences before deciding whether fiscal plans require a policy response.
“As for whether these fiscal policies culminate to stimulate economic growth and/or prove ‘Pro-business’ we will have to wait and see as consumers and corporates may simply bank the savings rather than spend/invest amid the global economic uncertainty.”
Giles Coghlan, Chief Market Analyst, HYCM <https://www.hycm.co.uk/en> , said:
“The mini-budget comes at a time when the government is trying to balance support for consumers and businesses with measures that might trigger further inflation, whilst also trying to reinvigorate a stagflationary economy.
“For investors, inflation poses the biggest threat to their portfolios, which the Prime Minister’s new emergency energy bills package should somewhat ease in the short-term. However, such a large fiscal package could contribute to elevated prices in the medium to long term that could inflict further damage to an economy and currency that are already on their knees. By cutting VAT, corporation tax and even beer duty, it’s clear that Truss and Kwarteng are committed to encouraging growth and supporting businesses who are struggling to meet the demands of a worsening cost-of-living crisis. Further tax cuts for consumers, in addition, should provide a welcome boost to their spending power as.
“That said, while the effect of these measures is likely to provide a temporary relief for the next few months, investors will be concerned that not enough is being done to power growth and economic resilience for the longer term.”
Commenting on the Budget and the un-costed giveaways remaining a concern, Dean Moore, Managing Director and Head of Wealth Planning at RBC Wealth Management, said: “There was nothing ‘mini’ about Chancellor Kwasi Kwarteng’s budget this morning, with a huge amount to unpack. Without the typical economic forecasts from the Office for Budget Responsibility, the statements felt ambitious with no one there to mark the Government’s homework.
“The un-costed giveaways remain a concern, especially the impact on UK debt and potential for interest rates to rise higher and for longer which would raise costs for business and mortgage borrowing.
“The headlines for higher earners are the additional rate of tax being abolished, saving 5% on incomes over £150,000 from April and a reduction in basic rate to 19%.”
Tom Hopkins, Portfolio Manager at BRI Wealth Management, said: “Today’s focus in the UK has been on the chancellor’s ‘mini-budget’ which was expected to unveil some major tax changes in a bid to kick-start economic growth and it didn’t disappoint. On the day the pound fell to its lowest level against the dollar since 1985, the new UK government is attempting to turn the vicious cycle of stagnation into a virtuous cycle of growth through a mix of tax cuts and a major programme of investment. On top of the energy price cap, measures include reversing the national insurance tax increase, cutting basic income tax to 19p, keeping corporation tax at 19% (scrapping the planned rise to 25%), and raising the threshold of how much a property must cost before stamp duty is paid to £250,000. The creation of 40 new ‘investment zones’ in England will allow target areas to reduce business taxes to encourage investment. This mini budget has already received a lot of criticism, with many accusing Kwarteng of ramping up borrowing just when doing so becomes expensive, when coupled with permanent tax cuts, many have criticised that this budget will push borrowing to unsustainable levels. It’s important to remember these sorts of measures do take time to bear fruit, they’re no quick fix.”
Ben Russon, UK Equity Portfolio Manager, Martin Currie, comments: “Kwasi Kwarteng and Liz Truss have followed through on their widely-trailed ‘pro-growth’ mini budget, gambling on debt-funded fiscal loosening in an attempt to boost the underlying growth trajectory of the UK economy. The three main criticisms of this approach are the timing, the impact it will have upon the national debt and the regressive bias of the policies, often described as ‘trickle-down’ economics. The timing criticism is predicated on the notion that it is too soon to implement inflation-stoking policies before the existing inflation problem has been resolved.
“There is an inherent conflict of enacting fiscal loosening whilst simultaneously the Bank of England is undertaking monetary tightening, with the inference that the latter will be forced to tighten harder and longer than otherwise would be the case. Obviously the new leadership team have only got a couple of years before the next General Election and hence do not have the luxury of time afforded to the Thatcher Government of 1979, a popular political and economic comparison. With regards the impact on the national debt, UK gilt yields are rising to their highest levels in over a decade and Sterling is plumbing new depths against the Dollar as the outlook for issuance ramps up. The equity market has not taken much comfort from the proposals, reflective of the challenges and risks in the period ahead.”
Garry White, Chief Investment Commentator at Charles Stanley comments: “Global investors failed to be impressed by Kwasi Kwarteng’s “great growth gamble”. British shares fell, UK gilt yields surged to almost 4%, and the pound hit a 37-year low against the dollar. Chancellor Kwasi Kwarteng’s announced a series of tax cuts – the largest since 1972 – while also boosting spending, measures that will turbocharge the country’s national debt. Gilt yields surged as the UK Debt Management Office laid out plans for additional issuance to fund this planned spending.
“A rise in the pound would have meant that the UK’s growth outlook would have materially improved. Investors believe that tax cuts and increased public spending could make the UK’s economic situation even worse – and see this gamble as risky. Just putting money into the economy does not result in sustainable long-term growth. We need more entrepreneurship and an upskilled workforce – moves that should help resolve Britain’s lacklustre productivity.”