INVESTMENT UPDATES

Kwarteng goes for growth

  • Shunil Roy-Chaudhuri
  • 26 September 2022
  • 5 mins reading time

Chancellor of the Exchequer Kwasi Kwarteng declared ‘We are at the beginning of a new era’ as he presented a Growth Plan that was a budget in all but name. Kwarteng stressed his aim was to focus on economic growth, not just redistribution, and to make the UK more globally competitive. He sought to do so through a mix of tax cuts, infrastructure investments, deregulation and government borrowing.

Against the backdrop of rising energy prices driven by Russia’s tragic invasion of Ukraine, Kwarteng said he would limit the rise in energy bills for households and businesses. ‘Help is coming,’ he said, as he announced a series of measures, including:

  • Limiting energy bills for average households to £2,500 a year for the next two years.

  • Providing an energy bill relief scheme to businesses that will provide a price guarantee similar to that of households.

  • A finance scheme for energy suppliers.

Kwarteng said he aimed to reduce peak inflation by around 5 percentage points through these actions.

Turning to tax, Kwarteng announced that:

  • The basic rate of income tax would be reduced from 20% to 19% from April 2023.

  • The 45% additional income tax rate (on annual income above £150,000) will be removed from April 2023, at which point there will be a single higher rate of 40%.

  • The Health and Social Care Levy will be cancelled, although he added that additional funding for the NHS and social care will be maintained.

  • The interim increase in the National Insurance rate, brought in for this tax year, will be cancelled from 6 November.

  • The first £125,000 of a property purchase is currently exempt from Stamp Duty. This will rise to the first £250,000. First time buyers currently pay no stamp duty on the first £300,000 of a property purchase. This threshold will rise to £425,000.

  • Enterprise Investment Schemes (EISs) and Venture Capital Trusts (VCTs) will remain beyond 2025.

  • The increase in tax on dividends will be cancelled.

  • Planned increases in the duty rates for beer, cider, wine and spirits will be cancelled.

  • Next year’s planned increase in corporation tax will be cancelled, so it will remain at 19%, not go up to 25%.

  • Reforms to IR35 (off-payroll working) rules introduced in 2017 and 2021 will be repealed.

  • Caps on bankers’ bonuses will be removed.

Given current high levels of job vacancies, Kwarteng said he wants to encourage people to join the labour market. He said extra support would be provided for unemployed over-50s. And he added that around 120,000 more people on Universal Credit will be asked to take active steps ‘to seek more and better paid work’, or face reduced benefits.

Against a background of UK economic stagnation, Kwarteng said he wanted to secure a trend economic growth rate of 2.5% over the medium term through reduced taxation. But he also said the consent process for national infrastructure projects was too slow. He announced that, in the coming months, a new bill would be introduced to speed things up by reducing planning restrictions and the impacts of some EU-derived laws. And he said infrastructure projects would be announced today to boost housing supply via the release of surplus government land. He added that the government would accelerate the unlocking of pension funds, enabling them to be used for investment in the economy.

Kwarteng also outlined a levelling-up strategy to boost 40 individual UK regions through targeted support. These include the Tees Valley, West Midlands, Norfolk and the West of England. For ten years businesses in these investment zones will have tax benefits such as: no stamp duty on purchases of land and buildings for commercial or new residential development, and no business rates on newly occupied business premises.

Kwarteng added that he wants to reduce government debt levels as a proportion of the UK’s economic output (gross domestic product, or GDP) over the medium term. He did not give specific details here but said that ‘fiscal responsibility remains essential for economic confidence’.

Impact on sterling

At Schroders Personal Wealth (SPW), we believe many of the measures announced by Kwarteng are designed to encourage businesses to invest and grow, which should be welcomed by investors. However, growth in productivity in the UK has been deteriorating for some time, along with the UK’s ability to attract foreign direct investment.

Since the Growth Plan statement, the pound has fallen to a record low against the US dollar. The markets are concerned that huge government stimulus could potentially drive up inflation more than economic growth, and markets are also concerned about the increase in UK government borrowing.

We should point out that, at SPW, we are global investors and hold most client investments in global assets. A weaker pound can support the performance of overseas equities (shares) when overseas earnings are converted back to sterling. Turning to fixed income investments, there has been a dramatic drop in the price of UK government bonds (gilts) in response to the announcement. With regards to bonds, we hedge our currency risk back to sterling to try to reduce currency risk over the longer term.

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