Our response to the Chancellor’s fiscal event

Problematic mini budget, clouded in intricately contradictory elements.

Intricate in that it can easily be presented as a wholly positive “fiscal event”… Yet without doubt this is simply putting spin on economic projections that appear based on only ideology and speculation. The evidence doesn’t support the ideology, when you drill into it. The inflationary consequences of previous stimulus, eroded the value of the stimulus and exacerbated recession. When we look at comparative graphs between tax take as a percentage of GDP, and GDP growth rates, there are several standout countries with both higher tax take, and higher average income per head – and higher GDP growth rate, with higher taxes… We do not believe taking higher taxes per se is it good thing, at all – but, conversely, increasing money circulation through lowering tax rates, in a time of inflationary expectations is counterproductive. Even, we believe, in the context of offsetting sector inflation by capping both domestic and business energy prices.

In our opinion, one of the elephants in the room is also political: the reversal in the increase in NIC. It’s not that we particularly advocated the NIC increase, but rather applauded the need to attempt a deliberate hypothecation of funds to pay for Social Care. This has now been removed and will add to overall borrowing and the cost of government debt, itself adding to upwards interest rate pressures. In addition, as quoted in The Economist: “an interest rate of just 3% today results in mortgages that absorb the same share of income as a rate of 14% did in 1980, after adjusting for the fact that mortgages are bigger and mortgage interest is no longer tax-deductible, calculates Neal Hudson of BuiltPlace, a housing website.”

That great old phrase “cash is fact the rest is fiction” is illustrated in the increase in today’s gilt yields, up by over 35 basis points on 10-yr gilts – and a huge 3% fall in the Sterling against the Dollar. This shows markets simply don’t trust Kwarteng’s mini budget. A falling currency makes imports more expensive, further fuelling continued inflation. We think that it is strategically confused and presents an expansionary Treasury against a contractionary Bank of England. Early days, of course, for this new incarnation of the Government, but macroeconomically, this budget makes little sense.

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