20 September 2022
New prime minister Liz Truss and Chancellor Kwasi Kwarteng will be keen to set out their vision for how to best support the UK public during the cost of living crisis while also invigorating British business growth, this Friday at a mini-budget. Below Quilter experts assess what their changes might be and their impact.
How the mini-budget will impact the markets
Richard Carter, head of fixed interest research at Quilter Cheviot says:
"The worry for the gilt market is that the government is planning to both reduce taxes and cap energy bills and pay for it all with a lot more borrowing.
"So we could see a material weakening in the public finances at a time when the BOE is not conducting QE but is actually hoping to reverse it.
"More government spending at a time of high inflation also risks making the situation worse and putting more pressure on the Bank of England to raise rates. So investors will be hoping for some prudence from the Chancellor but the selloff in gilt markets and the fall in Sterling suggests quite a high level of concern."
How the mini-budget will impact tax policy
Rachael Griffin, tax and financial planning expert at Quilter says:
"Chancellor Kwasi Kwarteng faces a tricky balancing act in terms of bringing the claims Truss made during her leadership campaign to fruition while providing appropriate support to the British public to help them through the ever-worsening cost of living crisis.
"This may be billed a ‘mini’ budget, but the costs could be vast, with the energy price freeze leaving government coffers beholden to future volatility in energy prices.
"The cards appear to be already on the table. Truss and Kwarteng are ‘going for growth’ with billions in new borrowing to pay for tax cuts, including a reversal of the national insurance rise, cancellation of the scheduled increase in corporation tax, and scrapping green levies on energy bills.
"The policy of scrapping the National Insurance hike once in office was a popular one for Truss, given that it will have made an unwelcome dent in people’s take home pay over the past months, especially those feeling the cost-of-living squeeze who were facing energy price rises on the horizon.
"While Rishi Sunak had already partly reneged on the NI hike by increasing the NI threshold, a further Tory U-turn to remove the 1.25 percentage point increase would help to ease people’s financial worries even further. However, the impact will be paltry compared to any proposed cap on energy costs.
"Truss has so far not put forward any detailed proposals for how the planned social care reforms will be paid for without the NI increase. Scrapping the NI hike may risk leading to a situation where Truss has to rob Peter to pay Paul if she wants to keep the planned social care reforms.
"A U-turn on the national insurance increases would mean someone earning £50,000 a year would see an extra £40 in their pocket each month, equating to £467 extra annually. Whereas the average graduate earning £27,000 would see a miserly £15 extra a month or £180 a year.
"Truss has also pledged to scrap green levies, which cost households around £150 a year, representing 8pc of the average total energy bill. If taken together with the NI reversal, a graduate could see annual savings of £330 and someone earning £50,000 would save around £620.
"Reversing the NI hike would have a much greater impact on someone earning £100,000, who would save £91 monthly or £1,092 annually – or an annual saving of £1,242 if you add in savings from scrapping the green levy.
"While pensioners will also benefit from the scrapping of green levies immediately, the social care levy only applies to pensioners from next year, so the NI reversal will save them 1.25% of applicable earnings from 2023.
"Axing this additional 1.25 percentage points of NI contributions will provide a boost for consumers but leaves a gaping hole in Treasury funding plans for social care."
