According to the Inclusion Foundation, around 1.3 million UK adults currently face financial exclusion, with 1 in 4 experiencing it at least once in their life.
What is Financial Inclusion?
Financial inclusion is when individuals have equal access and opportunity to financial products and services that meet their needs, regardless of their own background or income.
Therefore, working to create financial inclusion is an essential way in which we can work to create equality.
Financial Education
One vital step in creating financial inclusion is through financial education, as individuals need the skills and knowledge necessary to use financial products and services.
“In addition to building individuals’ skills and confidence, the government is working with partners to make financial communications easier to understand. HM Treasury have been working closely with Plain Numbers, an organisation that seeks to help regulated firms to better support their customers in understanding important communications.”
Whilst this is certainly positive progress, it is notable that they don’t actually say how they are building these skills and confidence. Perhaps we should be attempting to teach financial literacy at an adequate level throughout the education system so that children grow up to understand these financial products and services.
However, as stated by the FCA, “education alone is not enough. Sometimes, markets do not work well to produce good outcomes for consumers.”
Albeit a very important one, financial education is just one component in creating financial inclusion.
As noted by the FCA, we tend to need a current or checking account to be paid and to pay bills, yet by 2020, 1.2 million UK adults still had no current or e-money account.
They also found that many UK households were struggling to access credit, or struggling to access it at reasonable prices.
Many of those on lower incomes are unable to access financial advice, which can be an important tool for understanding, and dealing with, things like pensions, savings and investments.
They also found that 1 in 10 UK adults did not have access to an insurance product and that those in low-income households were less likely to be insured and more likely to face higher premiums if they did have insurance.
All of these things, combined with their finding that 1 in 5 UK adults have low financial capability, perfectly sum up the issues of financial exclusion.
Financial Inclusion Helps Economic Growth
According to a study conducted by Azimi, financial inclusion helps create inclusive growth. He found that whilst financial inclusion had more of a positive impact on economic growth for low-income countries, it still increased the economic growth of middle-income, upper-income, high-income, OECD and non-OECD countries.
From a social perspective, financial inclusion is vital if we want to work towards achieving equality. However, it also has positive economic effects as it helps to stimulate the economy and trigger growth.
by Red Star Wealth
The International Monetary Fund (IMF) has upgraded the UK’s economic growth forecast earlier this week, with predictions that the UK economy will contract by 0.3% rather than 0.6% as previously forecasted. However, this contraction still sees the UK settling into its position as the worst performing G7 economy this year.
Here you can see that the IMF predict 0.3% negative real GDP growth alongside a 6.8% inflation rate in the UK for 2023.
The rate of inflation is certainly heading in the right direction when compared to its rate of 9.1% last year. Nevertheless, this is still far higher than the Bank of England’s 2% target rate of inflation.
The above graph, taken from BBC News, using IMF data, shows UK growth forecasts in 2023 and 2024 in comparison with other G7 countries.
This graph clearly illustrates that the UK is facing a very different situation to its companions, acting as the only G7 nation with negative growth for 2023.
This said, it does also appear that we are on the right path, as despite predictions of a 0.3% contraction in GDP this year, the IMF also forecasts that we will move away from this shrinkage and into growth of 0.9% in 2024.
Given that the IMF has reduced how much they expect our economy to contract this year and increased the growth they predict us to experience next year, we can certainly see an increasing optimism in the UK’s economic outlook.
The Mini-Budget’s Aftermath
One of the reasons for the decline in the UK’s economic environment is the continued aftershocks of Kwarteng’s September mini-budget under Truss’ leadership.
“In the UK, investor concerns about the fiscal and inflation outlook after the announcement of large debt-financed tax cuts and fiscal measures to deal with high energy prices weighed heavily on market sentiment in late September. Amid high market volatility, the British pound depreciated abruptly, while yields on UK sovereign bonds rose sharply. The scale and speed of yield increases, especially at the long end of the curve, reportedly had a significant impact on levered positions held by UK institutional investors, particularly pension funds”
The fiscal policy proposed in the September mini-budget worked to counteract the Bank of England’s monetary policy. This is because Kwarteng proposed unfunded tax cuts in a somewhat frenzied attempt to stimulate economic growth, whilst the Bank of England sought to stabilise inflation through interest rate rises (which of course have the opposite effect on growth).
If we combine the aftermath of the mini-budget with continued high energy prices, rising mortgage costs and continued labour shortages, the IMF’s forecast comes as little surprise.
To look at the IMF’s World Economic Outlook for the UK in more detail, click here.
by Red Star Wealth
Let’s have a look at some of the key changes announced in Jeremy Hunt’s Spring Budget earlier today.
Pensions
Hunt announced that the pensions lifetime allowance was to be abolished, meaning more people can save unlimited amounts into their private pension without incurring a tax charge.
He also announced an increase in the tax-free yearly allowance for pension contributions, taking it from £40,000 a year to £60,000 a year.
Fuel, Alcohol and Tobacco
The 5 pence cut to fuel duty on petrol and diesel was due to end in April but Hunt has announced a freeze of fuel duty for another year, helping keep down costs for motorists.
Tax on tobacco is set to rise by 2% above the rate of inflation, or for rolling tobacco, 6% above inflation.
Most alcohol duties will be rising in line with inflation as of August, meaning supermarket prices for booze will increase. However, Hunt has also mentioned a draught relief scheme to be implemented from August 2023 which should keep pint prices in pubs down.
Energy
Energy bills for the typical British household were due to rise to £3,000 a year from April but the energy price guarantee has now been extended until the end of June, keeping this figure at £2,500 instead.
Hunt has that the government will invest £20 billion over the next 2 decades into low carbon energy projects.
Nuclear energy will now be classed as environmentally friendly for investment purposes, meaning it will qualify for the same investment incentives as renewable energy.
Hunt has also stated that £63 million will be given to leisure centres to help them cope with rising swimming pool heating costs and investment to become more energy efficient.
Childcare
One of the main highlights of the budget is the expansion in state-funded childcare. Hunt has promised up to 30 hours a week of free childcare for eligible households with children as young as 9 months. This won’t be fully implemented until September 2025 but will be rolled out in stages from April 2024.
Families on universal credit are set to receive childcare up front rather than in arrears. Instead of a cap of £646 per month per child, this will now be increased to a maximum of £951.
Hunt has further announced relaxed rules in England to allow childminders to look after more children.
He’s also increasing the funding paid to nurseries providing free childcare by £204 million from September this year, rising to £288 million next year.
Corporation Tax
Corporation tax will indeed be increasing, taking it from a 19% tax on taxable profits over £250,000, to a 25% tax. However, Hunt has also announced a new policy of full capital expensing over the next 3 years which will allow companies to deduct money invested into new machinery and technology from their profits, helping to reduce their tax liability.
Support for the Vulnerable
Hunt has announced a new system of Universal Support across England and Wales. This is a new voluntary employment scheme for those who are disabled or have health conditions. Up to £4,000 per person will be invested to help support around 50,000 people a year in finding suitable work which caters to their needs.
Hunt has also announced funding of:
£400 million for mental health and skeletal support
£3 million to help those with special needs to enter the workforce
An additional £10 million over the next 2 years to help charities in England who work in suicide prevention
Other Notable Points
-£200 million this year to help local councils in England repair potholes
An extra £11 million in defence budget funding over the next 5 years
by Red Star Wealth
Though the Bank of England has not officially predicted a recession later this year, it is looking increasingly likely. This is due to the huge increases in the rate of inflation and the labour shortages continuing from Brexit and Covid. Here are some ways of preparing your personal finances in case a recession takes place.
Save, save, save
It may be a good idea to start building up your savings account, wherever possible. Having a strong emergency fund means you are prepared for unexpected costs. You never know what’s round the corner so it is best to prepare for the worst and expect the unexpected.
For example, your income may reduce from either losing your job or having your hours cut down due to less consumer demand in the economy. This would make essential payments harder to deal with, especially those arising out of the blue, such as your car breaking down or your bills rising (the latter being incredibly likely at the moment).
Go Debt Free
Try to pay off existing debts wherever you’re able to. Consider making a debt repayment plan… this could involve paying off priority debts first, before focussing on the ones with the highest interest rates in order to save money on interest repayments.
Priority debts are things like gas and electric bills and mortgage arrears (missed mortgage payments). These debts should be prioritised as they have the potential to cause the most issues, such as having your electricity cut off, or losing your home.
Avoid taking on any extra debts as you don’t want the amount you owe to become unmanageable
Shop Around
You can try to reduce your expenses by switching to cheaper options. Even though switching accounts can be a pain, it’s worth it in the long run.
If your weekly shop costs a bomb, maybe try to find a cheaper supermarket and cut down on certain luxury goods. If there’s ever a time to be frugal it’s now.
Avoid Investment Panic
Don’t let panic affect your investment choices. You shouldn’t let emotion cloud your judgement. Your investments dropping in value in the short-run during a recession does not mean they lack long-run profitability. For more info on this, check out this previous blog on the importance of long run investment.
It’s also worth considering diversifying your investments now so that one industry facing a decline during recession doesn’t sink your whole portfolio.
by Red Star Wealth
We all hear the word ‘inflation’ so much that you’re probably sick of it. However, stagflation seems to be a topic less talked about. With the risk of stagflation having increased in the UK, we think it’s important to have a quick rundown of what this actually means
The Different Types of ‘-flation‘
Inflation- a general rise in prices, meaning you get less for your money
Disinflation- a fall in the rate of inflation. Prices are still rising but at a slower rate
Deflation- a general fall in prices
Stagflation-persistent high inflation, coinciding with high unemployment and slow economic growth. It is a combination of both ‘stagnation’ (slow growth, no wage increases and high unemployment) and ‘inflation’
Stagflation is a Rareity
Until the 1970s, most economists shared the belief that inflation and unemployment have an inverse relationship. This means that when inflation increases, unemployment tends to decrease. However, we now know this is no longer the case
What Happened in the ’70s?
We haven’t faced stagflation since the 1970s. This economic situation was caused by the oil crisis acting as a supply shock
The oil crisis meant the UK and US could no longer import oil from the Middle East. Continued strong demand with a huge restriction on supply meant that oil prices shot up by a whopping 300%
Demand and supply diagram by Red Star Wealth
As shown by the above diagram, when supply restricts, prices are pushed up
What Causes Stagflation?
Supply-side shocks, such as labour shortages or the example of the 1970s oil crisis
Certain fiscal and monetary policies, e.g, government spending being too high, or interest rates being too low
What Would it Mean for Us?
Stagflation would hit the average UK household hard; it would mean people’s wages weren’t keeping up with the price increases of goods and services
It would essentially be a worsening of the current cost-of-living crisis
Once it starts, it is difficult to reverse
Managing inflation involves a reduction of the flow of money to reduce inflationary pressures caused by high demand. For example, the recent government decision to raise the interest rate to 1.75% is a way of trying to counter inflation
On the other hand, managing a recession usually involves an influx of money into the economy to kickstart economic activity and encourage spending. Part of this could be lowering the interest rate
Given that stagflation is a combination of both of these, it is very difficult to solve, as these are two completely opposite approaches
Stagflation can be dealt with by dealing with the supply-side shock that caused it as quickly as possible. Then, action should be taken to reduce inflation before dealing with the stagnation aspect
Will we enter a period of stagflation?
In its latest Financial Stability Report, The Bank of England has said the outlook of the UK economy “is subject to considerable uncertainty”. Click here to read the full report.
As discussed in one our previous blogs, inflation is estimated to reach 13% later this year, meeting the first condition of stagflation
However, the UK’s GDP actually rose by 0.5% over the 3 months preceding April this year. This said, this growth could certainly end up being negated if there is a drop later this year caused by the cost-of-living crisis reducing spending. Additionally, whilst our unemployment rate is actually low, there are still labour shortages caused by Brexit and Covid reducing the size of our labour force
However…
The average inflation of Great Britain in 1975 was an enormous 24.11% so we aren’t in the same boat yet
We can’t predict for certain exactly what will happen to the economy. At the end of the day, we aren’t psychics or oracles! All that this info means is that the risk of stagnation has increased, not that it is inevitable and unavoidable
