Mini Budget Summary following the September 2022 fiscal Statement
Written by Rebecca Lancaster
Associate Operations Director
Summary of the Mini-Budget
The changes announced by the chancellor on Friday 23rd September included some of the biggest UK tax cuts in over 50 years including:
· Basic rate of income tax to be cut to 19%
The decrease in the basic rate of income tax from 20% to 19% has been brought forward to April 2023.
· Reversal of the recent increase in National Insurance & Dividend Tax
The temporary 1.25% increase that was to be effective from 6th November has now been reversed together with the 1.25% increase to dividends tax that will be reversed from April 2023.
· Scrapping of the planned increase in corporation tax
This was to increase to 25% in April 2023, but will now remain at 19%.
· Stamp duty threshold increased
This will increase to £250,000 from £125,000 for the nil rate threshold and from £300,000 to £425,000 for first-time buyers. The maximum value of a property at which first-time buyers’ relief can be claimed will also be increased from £500,000 to £620,000.
Other announcements included the removal of the bankers’ bonus cap and the additional support to householders with an Energy Price Guarantee scheme.
What were the effects of the mini-budget?
Following the announcement, Monday 26th saw the largest moves in five-year UK gilt yields since 1976 and by the Tuesday, the UK mini-budget had already resulted in extensive moves in the value of UK assets and gilt yields.
The tax cuts announced saw the pound fall to record lows against the US dollar. Sterling fell to close to $1.03 early on Monday 26th. The last time the value of the pound was anywhere near these levels was in February 1985.
Interest rate expectations
UK markets are now pricing-in a still larger interest rate hike in November. Market estimates of where UK interest rates might peak have now settled closer to 6% – this being roughly a whole 1% higher than markets were pricing-in prior to the UK government’s fiscal statement.
Borrowing costs have also increased; they reached their highest levels since August 2008. The effective rate of interest on borrowing for two-year and five-year fixed periods reached 4.5%.
What is the impact for you as a client?
What were the effects of the mini-budget?
The most direct impact of the mini-budget for you should be to increase the money in your pockets thanks to the generous tax and National Insurance reductions. These naturally favour higher earners who pay the most tax. If you are a retail and commercial client, you will also welcome the extensive measures aimed at capping energy bills in the near term. However, any benefit may be more than offset by inflationary pressures and the increasing interest-rate burden for you with variable-rate mortgage contracts.
Implications for markets are both uncertain and mixed. On the one hand, it was intended to be a ‘growth’ budget, with tax decreases which would normally stimulate demand and feed through into higher corporate earnings, thus being positive for markets. However, many of the (unintended) subsequent economic effects we have recently seen are generally negative for markets. The weaker pound will drive up import costs and inflation, whilst the prospect of higher interest rates will lead to higher debt servicing costs for individuals, companies and also the Government, thus potentially dampening demand, capital investment and public spending. However, it should be noted that the budget’s economic consequences are still not known, as interest rates and the pound are still ‘fluid’.