The reaction to ‘Kami Kwasi’s Mini Budget has been little short of hysterical.

Already there’s been an embarrassing U turn on scrapping the 45% tax rate, but in my opinion that minor error of judgement should not be allowed to de-rail the spirit of the programme that our new government aims to deliver.

Let’s look first at the politics of it and then at the economics.

During the leadership campaign Liz Truss positioned herself as the change candidate while Rishi Sunak would be the continuity candidate. Continuity of what? He and Boris missed a gilt-edged opportunity to set Britain on a new path after vanquishing Corbyn in December 2019. A clear majority that undid the disastrous premiership of Teresa May combined with a soporific new Labour leader meant they could deliver on the Brexit premium by turning the UK into the Singapore of Europe.

And what did we get? Higher taxes, bigger government and a commitment to the suicidal economics of Net Zero. Boris caved to his wife on green issues and, once Dominic Cummings was off the scene, he caved to his chief medical officers and followed the WEF and WHO mandates on banana syndrome. That triggered the spending splurge that triggered the forty year high inflation rate that this government inherits.

There are two years to the election and the economy is a basket case. What choice do Truss and Kwarteng have but radical change? She campaigned on reversing Sunak’s NI and corporation tax hikes so failing to implement those cuts would have brought her integrity into question. As I mentioned in a recent article, poor productivity has been the Blight of Britain for decades.

Would any government have been able to ignore the impact of the energy crisis on families and business? Never have we faced 600% rises in one of the staples of everyday living on top of the pandemic-induced inflation in almost everything else. There may have been smarter or more selective ways of implementing subsidies but time was against anything too elaborate.

While the 1p reduction in income tax is welcome, it should have been clear that the removal of the cap on bankers’ bonusses and the abolition of the 45p tax rate would be toxic in the middle of a cost-of-living crisis. That said, removing the cap is rolling back one of the EU restrictions on the free market and will reinforce London’s position as a financial centre. Ironically the cap may have cost banks more because they have had to raise salaries which increases their fixed costs and, if they do want people to spend more time with their families, firing them has become more expensive.

A relative handful of banks and bankers have crossed the channel since Brexit but this will stop any potential leavers in their tracks, attract top performers back to London and raise millions of new tax revenue in the years to come. The only downside of reversing the abolition of the 45p rate is that it was one in the eye for Nicola Sturgeon who must be breathing an enormous sigh of relief in among all the schadenfreude.

So what about the economic impact?

I’m a great fan of the Laffer Curve in which lower tax rates attract a higher tax take because of greater incentives to work. There’s no doubt in my mind that furlough, lockdown and enforced ‘quality time with the family’ has impacted the ambition and work ethic of millions. Let’s hope the reduction in income, dividend and corporate taxes will re-motivate employees and entrepreneurs to get back on their horse and create some serious wealth.

People seem to have forgotten that the roll back of the NI increases benefits the low paid the most, while also benefitting the country’s employers on whom NI is simply another payroll tax. Oh, and who is the biggest payer of employers NI? That sacred cow, the NHS.

What about the crisis in the gilts market supposedly triggered by the Chancellors’ statement? He’s an easy scapegoat, until you look under the covers at what was actually going on. Who knew that the pension institutions providing defined benefit schemes to those lucky folks in the public sector (or previous retirees from the days when private companies provided these gold-plated income-for-life plans) were loaded to the gunwhales with derivatives called LDIs? These Liability Driven Investments are used to hedge against the impact of interest rate changes and inflation.

Remember, the main instruments used to fund pension commitments are government bonds, or gilts, whose prices are highly sensitive to changes in interest rates. The higher rates go, the lower the gilt prices plummet. As the markets digested the unfunded spending plans, gilt prices fell. The more they fell, the more the pension funds had to cough up new cash for margin calls on their highly leveraged LDIs.

They then approached the Bank of England saying ‘we’re about to run out of cash which means we’ll be trading insolvent which means we will go bust!’ At that point the Bank stepped in with £65 billion of gilt purchases to steady the ship. That programme will only last for a short time, after which the whole thing could rinse and repeat. A worrying systemic risk, but surely more to do with the Bank and the regulators rather than the fault of the government?

Anyone who thinks falling bond prices and rising yields are unique to the UK simply isn’t paying attention. The 40 year bull market in bonds was over long before the Chancellor stood up in Parliament last Monday. The view of the markets is that America’s Fed is doing the most to tackle inflation compared to the UK, Europe of Japan. Hence all currencies are weakening against the greenback just as bond yields rise. This should be laid firmly at the BOE door rather than that of the Treasury. The only money I’m investing in at the moment is gold – fiat currencies seem to finally be recognizing the impact of 15 years of debasement and it’s not pretty…

And what about the disgraceful intervention by the IMF in stating that said that due to “elevated inflation pressures” it did not recommend “large and untargeted fiscal packages at this juncture“. Liz Truss’s response to this should amount to a maximum of two words. How dare they talk to the sixth largest economy in the world like we’re some banana republic of the kind they normally bail out? Where was the IMF criticism of the Biden administration when it announced $1.9 trillion of unfunded spending last year? How did Germany escape IMF opprobrium when it announced its own unfunded €200 billion subsidy programme for German energy consumers last week? The clear and not altogether unsurprising message is that the IMF regards unfunded state spending by left-leaning governments as fine but woe betide a free market capitalist government from using the same strategy.

The implied need to raise interest rates also caused mayhem in the mortgage market, with 1,688 products being withdrawn and brokers sitting in two hour telephone queues to try and grab loans before they were removed (now they know how consumers feel trying to contact High Street banks). The products will come back, but the higher rates on offer will inevitably have a cooling effect on the property market. Would that be a bad thing given the concerns over affordability in recent years?

Levelling Up 2.0?

The jitters in the financial markets have drowned out the good news that Kwasi also announced. The creation of 38 ‘Investment Zones’ with substantial tax reliefs that can hopefully re-ignite the appetite of UK business to invest.

This is a ten year programme offering these benefits:

• Business rates – 100% relief from business rates on newly occupied business premises, and certain existing businesses where they expand in English Investment Zone tax sites. Councils hosting Investment Zones will receive 100% of the business rates growth in designated sites above an agreed baseline for 25 years.
• Enhanced capital allowance – 100% first year allowance for companies’ qualifying expenditure on plant and machinery assets for use in tax sites.
• Enhanced structures and buildings allowance – accelerated relief to allow businesses to reduce their taxable profits by 20% of the cost of qualifying non-residential investment per year, relieving 100% of their cost of investment over five years.
• Employer National Insurance Contributions (NICs) relief – zero-rate employer NICs on salaries of any new employee working in the tax site for at least 60% of their time, on earnings up to £50,270 per year, with employer NICs being charged at the usual rate above this level.
• Stamp Duty Land Tax (SDLT) – a full SDLT relief for land and buildings bought for use or development for commercial purposes, and for purchases of land or buildings for new residential development.

This is indeed welcome news, but it needs to be reinforced with a major reset of planning rules and procedures. These should be handled at local level with fast tracking of any commercial development within an Investment Zone. That alone would tempt companies to relocate if they can avoid years of nimbyism and red tape from under-resourced local authorities.

Johnson and Sunak talked big on levelling up and delivered bugger all. If the Red Wall is to vote Tory in 2024, they need to see some rapid progress on what could be described as Levelling Up 2.0.

Now It’s Up To Us

For me, it’s a guarded thumbs-up to Truss and Kwarteng. They had to be radical and they were. They need to quickly show how the measures will be funded but they had to show their serious intent from the first day back in office after the unexpected hiatus of the Queen’s passing.

What matters now is speed of implementation. And that’s something in which we all have a part to play. The kind of companies we raise capital for will be in the vanguard of this New Britain. That’s why we are so excited and privileged to share them with you.

Until next time.

Graham