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
If you’re feeling a bit dizzy from all the U-turns in economic policy under Truss’ leadership recently, we can’t blame you! It’s difficult to keep up with it all at the moment, so we are here to help. Let’s have a look at what’s been going on…
Goodbye Kwarteng, Hello Hunt
Jeremy Hunt has recently replaced Kwasi Kwarteng as Chancellor, bringing with him even more economic changes.
Liz Truss has stated that Government spending will low grow less rapidly than she planned, meaning lots of U-turns on her previous plans.
The Medium-Term Fiscal Plan
On 26th September 2022, Kwarteng revealed that his Medium-Term Fiscal Plan would be presented on 23rd November.
This announcement is still in place, except now it’s happening earlier than planned and being delivered by a different man (Hunt). The Treasury announced on 10th October that the Chancellor would bring forward the announcement of this plan to the 31st October as opposed to 23rd November.
Triple Lock Confusion
The triple lock means that the state pension rises each year in line with either inflation, average earnings, or 2.5%, depending on which figure is the highest.
On 17th October, Hunt indicated that the Government was considering shelving the triple lock on pensions. However, two days later during Prime Minister’s Questions, Truss confirmed that the triple lock was there to stay.
“Firstly, we will reverse almost all the tax measures announced in the Growth Plan three weeks ago that have not started Parliamentary legislation” -Jeremy Hunt
Income Tax U-Turns
Hunt has announced that he’s reversing the proposed 1% cut in the basic rate of income tax announced in Kwarteng’s mini-budget. Instead, the basic rate will remain at 20%.
He’s also announced that the Government will not proceed with abolishing the 45% additional rate of income tax, as was previously announced in the mini-budget.
Alcohol Duty Freeze U-Turn
Hunt has also abandoned Kwarteng’s plans of freezing alcohol duty rates for a year, commencing 1st February 2023. This freeze is no longer going ahead, which is estimated to save the Treasury £600 million a year.
Corporation Tax Double U-Turn
Kwarteng announced in his mini-budget that the previously planned rise in corporation tax due to come into force in April 2023 would no longer go ahead.
Since his replacement, Truss has stated that the rise will go ahead next year after all, rising from 19% to 25%.
Energy Bill Price Cap
During Prime Minister’s questions on 19th October, Truss seemed to lean heavily on her energy bill price cap as a supportive measure for those most vulnerable. However, this energy bill support to ensure that the typical household’s average bill doesn’t exceed £2,500 is only to last until April 2023. The support is only actually in place for half a year.
Stamp Duty Land Tax
One remaining element of Kwarteng’s mini-budget is the changes to Stamp Duty Land Tax. The nil-rate tax threshold will stay at the increased £250,000, and £425,000 for First-Time Buyers.
So, that’s all of the recent changes summed up… for now! Things may be due to change again with Truss’ resignation, so stay tuned.
by Red Star Wealth
With the Bank of England’s emergency bond buying support set to end today (Friday 14th October), we think it’s important to fill you in on what exactly has been going on.
The Mini Budget
Kwarteng’s mini-budget on 23rd September 2022 saw the Government announce enormous tax cuts with very little explanation as to how these would be funded. This has triggered strong waves of uncertainty which have in turn affected the UK’s financial situation.
It led to a steep drop in the value of the pound as well as rises in government borrowing costs.
Government Borrowing
One of the ways in which the Government generates enough money to fund its spending plans is by selling government bonds (also known as gilts) to investors. This acts as a form of debt which is paid back over time with the addition to interest.
They sell these bonds to investors such as large pension funds and big banks on international markets.
These investors have been demanding much higher interest rates to lend to the UK government because they have concerns over whether their tax cut plan will actually work.
What is the Link with Pension Funds?
Pension funds tend to invest in bonds as they are seen as a low-risk investment, giving a low but reliable return over a long period of time. They also buy a form of insurance to protect the value of these bonds.
As government borrowing costs increased, insurance providers began charging a higher rate of interest.
In order to afford these extra payments, many pension funds began selling their bonds, with further reduced their price and pushed up their interest.
This created a negative spiral, as the more bonds pension funds sold, the higher the cost of government borrowing became, meaning insurance payments rose, meaning even more bonds were sold, and so on, and so forth.
Bank of England Emergency Intervention
The Bank of England (BoE) decided to implement an emergency bond buying scheme as a temporary measure to stop the prices of government bonds falling any further and thus limit the need for pension funds to sell any more of them.
It did this by buying lots of government bonds. By buying these bonds, government borrowing costs should reduce, as it eliminates the need to pay those huge interest rates demanded by investors we mentioned earlier.
By buying these bonds, the BoE has helped stabilise their price, preventing further sales from pension schemes that could ultimately cause their collapse. They have essentially halted the market turmoil that was putting pressure on pension funds.
Despite announcing that they would buy up to £65bn bonds, with a daily purchase limit of £5bn a day, they have only bought around £5bn in total.
Only a Temporary Measure
The BoE’s intervention is a temporary measure aimed at maintaining financial stability. Their bond-buying scheme is due to end today, despite pension funds trying to get them to extend their intervention.
On Wednesday, when they announced that their emergency support would end on Friday as planned, the price of 20-year UK bonds hit new lows, with interest rates going up to levels not seen since 2002.
However, the idea behind the BoE stopping their intervention is that they expect demand to increase as pension funds rebalance their portfolios and stabilise. Think of the measure of them allowing pension funds some time to get back on their feet.
The BoE has not completely withdrawn support either. They have announced further measures to help pension fund sthat have been negatively affected by the recent market volatility. Under this measure, funds will be able to use a wider range of assets to access money to meet short-term financial needs. This should mean less pension funds having to turn to selling government bonds to raise cash, which is what was happening after Kwarteng’s mini-budget.
What a mess! If you’re still worried about what this means for you and your pension, reach out to a financial adviser for help.
by Red Star Wealth
Last Friday, on 22nd September 2022, Kwasi Kwarteng, the Chancellor of the Exchequer, announced in his mini-budget statement a set of economic policies which have been the subject of much discussion. Read on for an overview of some of the changes he’s made.
National Insurance and the Health and Social Care Levy
Since 6th April 2022, workers and employees have been paying an extra 1.25% National Insurance, taking the rate up to 13.25%. This increase was due to be replaced by the Health and Social Care Levy (a 1.25% levy on top of a 12% National Insurance rate).
Details of the Health and Social Care Levy were announced by Boris Johnson on 7th September 2021 and it was to be introduced by April 2023. The levy was for increased health care spending to deal with the backlog of patients awaiting treatment on the NHS.
Some of the levy was to be channelled into the social care system due to our ageing population, effects from the pandemic, staff shortages and lack of government spending.
The levy was to be calculated the same as National Insurance but would’ve also been paid by those at state pension age.
The levy was expected to raise around £13billion for health and social care. Despite cancelling the proposed levy, the Chancellor has claimed that funding for health and social care services will remain at the same level as if the levy was actually in place. I guess we will have to see…
The good news is that Kwarteng, along with cancelling the levy, is reversing the 1.25% rise in national insurance come 6th November 2022. The aim of this is to reduce workers’ and businesses’ tax burden and encourage growth to stimulate the economy.
Income Tax
As well as the decrease in income tax, Kwarteng announced some changes to income tax. The basic rate of income tax will decrease from 20% to 19% as of April 2023 (a year earlier than planned). Additionally, the additional rate of tax (set at 45% and applied to incomes above £150,000) is to be abolished.
In the short term, it seems as though most people will be paying less tax. However, former chancellor Rishi Sunak announced in 2021 that the personal allowance and higher rate threshold would be frozen from the 2022-23 tax year until the 2025-26 tax year.
This freeze will essentially offset the tax reduction announced by Kwarteng for most ordinary people.
It is the high earners who will fare the best. The rich, as always, seem to be getting richer. Abolishing the additional rate of income tax means that the highest earners, including millionaires, are in the same tax band as anyone earning over £50,271.
Corporation Tax
The Chancellor has cancelled the proposed rise in Corporation Tax. The tax was to increase to 25% starting April 2023 for firms which make over £250,000 profit. However, this will now be remaining at 19% for all firms, regardless of their profit.
Stamp Duty Land Tax (SDLT)
The 0% SDLT band has been doubled from £125,000 to £250,000. The idea is that cutting SDLT will promote residential property investment and spending on household goods.
The threshold before paying SDLT has also been increased for first-time buyers from £300,000 to £425,000, making it easier to get your foot on the housing ladder. The average house price for first-time buyers in the UK in 2021 was around £264,000, but if you’re spending more than this, the increased threshold is certainly handy.
Universal Credit
Households on universal credit may find it more difficult to claim. Those earning less than the equivalent of around 15 hours a week at National Living Wage will have to regularly meet with their work coach. If failing to do so, they risk a reduction in their benefits
There have certainly been mixed reactions to Kwarteng’s mini-budget, but how you feel about it is entirely up to you.
