Is The 'Mini Budget' Really To Blame?


Is The 'Mini Budget' Really To Blame?

Everyone seems cross, but look behind the headlines.

September 30, 2022

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The market has been rocked this week. Many are blaming the 'mini budget'. Today, we take a closer look.

Everyone seems very cross about the 'mini budget', but I can't help thinking we're all missing the point.

It is putting a lot of money in peoples’ pockets. How closely have you looked at it?

It’s true, the country probably shouldn’t be borrowing more money, but then we have been saying that for the last two decades and nobody has ever seemed that concerned.

When the government announced their plans for a time of ‘austerity’ in 2010 nobody liked that very much either and the backlash was huge at the time. Nobody likes austerity, everybody likes spending, so why is the general public so upset about this spending?

Maybe a spending plan to increase growth is a good idea? I’m not saying it is, I’m saying I don’t know, but it might be worth a shot. No economist is going to like it because that would be like asking your accountant if you should take a bigger mortgage to buy a bigger house!

That said, we thought we might try and look past the borrow mayhem and actually look at what is in it.

We have heard about little else since the Chancellor unveiled his Growth Plan for the British economy last Friday.

Kwasi Kwarteng made drastic measures to stimulate economic growth, tackle inflation, support businesses and help households with the rising cost of living.

Well-armed with his scholarship from Harvard and a PhD in economic history from the University of Cambridge, he went to work. (Most impressively he was also a member of the winning Cambridge team on University Challenge).

His understanding of economics is certainly not something that can be argued against, so let’s see what possibly the smartest man in government came up with:

Corporation tax rise cancelled, keeping it at 19% as government sets sights on 2.5% trend rate of growth. The current rate of 19% was due to rise to 25% on profits exceeding £250,000 from April.

This will save millions of businesses a huge amount of money enabling reinvestment and growth. This also makes us competitive to new companies and investment from around the world.

Basic rate of income tax cut to 19% in April 2023 – one year earlier than planned – with 31 million people getting on average £170 more per year. And the controversial part which probably should have been avoided, the addition rate of tax (45% above £150,000) was dropped meaning the highest rate is now going to be 40% again.

National Insurance tax will be lowered by 1.25% for both employers and employees giving a boost to profits and pay packets. 1 million businesses in the UK will save around £10,000 a year.

Stamp Duty cuts will help people on all levels of the property market and lift 200,000 homebuyers every year out of paying the tax altogether. The threshold where no stamp duty is payable is rising from £125,000 to £250,00. For first time buyers it’s even better, the threshold of £300,000 is being increased to $425,000.

This is all alongside the energy price cap which the government are introducing to help us all pay our bills.

So What’s The Problem?
To be honest for most citizens of the UK there isn’t one – although everyone hates rich people so the upper tier tax cut has blinded a lot of the public from seeing the rest of the package.

In short, this is an incredible injection of money into households and businesses. On the face of it, it’s a very very generous growth package.

Our previous fears of a housing market crash due to rapidly rising interest rates, might now be avoided. First time buyers maybe keep the market afloat as well as discounts at the lower end of the market. Given the average house price in the UK is around £292,000, most buyers won’t pay any tax at all when buying a house.

However, and here is the problem: we can’t really afford it.
Our national debt is ever increasing and it’s not a sensible time to create a government bond crisis (ie. make our borrowing more expensive by upsetting the market who don’t want to buy more of our debt).

It also doesn’t help when you tell the market what you’re about to do. Gordon Brown told the gold market in 1999 that he was going to sell half of the UK’s gold reserves; subsequently the price of gold dropped by 10% before they had even got round to selling any.

Incidentally the ECB (European Central Bank) said they were going to reinvest their expiring bond purchases for exactly the same reason. Keep the cost of borrowing at an affordable level and contain the market.

The ECB balance sheet currently hold 3 trillion euros worth of bonds.
The US Federal Reserve currently holds a little under $9 trillion worth of bonds.
The Bank of England currently holds £895 billion worth of bonds.
Given that US GDP is about 7.2 times the size of the UK’s, the BoE balance sheet equates to about $6.9 trillion in US terms. Therefore about 30% smaller.

Let’s assume that the government’s extra borrowing will total about £100bn. The government have therefore just told the bond market that they are going to sell £100bn worth of gilts (UK government bonds).

Of course there was a massive drop in price. This is why the Bank of England stepped in to stabilise. It wasn’t chance or even unexpected, it was the obvious result and the BoE would have been ready for it.

Ultimately, we’ve got a tricky economic situation here where rates need to rise, we need intervention from government to help households, and we need government borrowing costs to remain at an affordable level.

The solution that Kwasi Kwarteng has come up with is a stimulus package for everyone, including business to help growth, reduce tax on housing to keep the market from dropping as the interest rates increase at an unprecedented speed.

We don’t know if it will work but our fingers are crossed.

We’ve been saying for a while what a disaster increasing rates too fast would be. How it would cause huge issues for businesses and households alike. This package is focussed on solving most of the problems.

The only thing they shouldn’t have done was get rid of the top rate of tax because now it’s all anyone is talking about and is probably the most insignificant thing in it.

So, if the borrowing is the ONLY problem with the package, just how bad is the UK’s situation compared to other countries around the globe?

We’ve compared central bank balance sheets, so now let’s look at government debt to GDP ratios.

Here is a list of the top ten major economies with the most national debt compared to their GDP. The reason we look at it like this rather than outright debt is because it shows affordability.

The higher income earner will be able to get a bigger mortgage etc. Same with borrowing on a national level.

  1. Japan 266%
  2. Greece 193%
  3. Lebanon 172%
  4. Italy 151%
  5. United States 137%
  6. Singapore 131%
  7. Bahrain 128%
  8. Portugal 127%
  9. Canada 118%
  10. Spain 118%

Others of note are France 113%, Belgium 108% and then the UK on 99%. Our best guess is that the mini-budget borrowing will take us to about 104%.

I’m not saying that the package is a good idea, or that it isn’t a little irresponsible given how much debt we are already in, BUT does it deserve quite so much upheaval? Could it work?

I realise that journalists don’t like good things, but is there a tiny chance that Kwasi knows what he’s doing at a time when we could all do with a tax break and a little stimulus?

The Cambridge and Harvard University graduate might just be trying something a little ‘un-British’ and throwing some money at the problem.

It’s also important to differentiate between the ‘real economy’ and the equity market. The package was aimed at increasing growth for corporate UK and put a little extra cash in everyone’s pockets.

The government is picking up the bill and that might come back to bite us, but for now, maybe we should just embrace it.

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