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Tax rate U-turn: is it enough to right the markets?

Author: ICAEW Insights

Published: 04 Oct 2022

Following the government’s U-turn on the abolition of the additional rate of income tax, financial services professionals give their view on its impact.

This week, large investment firm deVere Group announced it was pulling all UK property projects due to the “heightening economic upheaval” in the country. 

Nigel Green, CEO of deVere Group, believes that the U-turn on the abolition of the 45% rate of income tax. Nor will bringing forward the medium-term fiscal plan. It underscores just how badly the so-called mini budget was received by financial markets, he says.

“Having the announcement sooner rather than later is the right thing to do, as the longer the markets wait for proof that the government’s fiscal agenda is sound, the higher the risk of turbulence. However, the bringing forward of the announcement and the scrapping of plans to axe the 45p tax rate stinks of desperation.”

These amendments to the mini-Budget are unlikely to calm markets in a significant way, says Green. “Sterling did regain some ground against the dollar and gilt yields fell on the scrapping of the 45p rate announcement, but the pound will remain under pressure and high bond yields remain of serious concern. Investors’ trust in UK plc has had a hole blown through it.”

Other financial services professionals echo some of Green’s views. While some welcomed the U-turn as the right thing to do, most singled out the indecisiveness and inconsistency that this highlights, and the fact that the measures are unsubstantiated.

“The additional rate tax cut was politically toxic so it seems a U-turn was inevitable. The intent to rein in the fiscal largesse will be welcomed by markets. Sterling is stronger but bonds remain weak,” says Philip Dragoumis, owner of London-based Thera Wealth Management. “However, there is a substantial ongoing deficit to fund. And if, as rumoured over the weekend, this is likely to be financed by cuts in spending and benefits, then another showdown looms.”

Confidence is still lacking in this government, he says. The economy also faces a cliff edge in a couple of weeks, when the Bank of England’s emergency bond buying programme comes to an end.

Another wealth manager, Alex Shairp, founder at Glasgow-based Blackmount Private Wealth, says that the U-turn was understandable due to political pressures, but it only adds to the chaos and uncertainty. “A flip flop doesn’t restore confidence.”

“The markets were not spooked by the income tax fiddling,” Nick Lincoln, director at Watford-based Values to Vision Financial Planning. “They were spooked by high inflation and the enormous energy bill support, and on that front nothing has changed. It’s a symbolic move but one that will likely do nothing to counteract the pressure on sterling.”

This is, at its heart, not a policy issue but a credibility issue, says Lewis Shaw, founder of Mansfield-based Shaw Financial Services. “Either they did know what would happen to financial markets but didn’t care until it became too politically toxic, or they didn’t know what would happen, proving they’re economically illiterate. Either way, their reputation is in tatters, market confidence has packed its bags and got on a plane and mortgages are shot to bits.”

Mortgage brokers welcomed the U-turn and bringing forward the medium-term fiscal plan, but are concerned about the impacts on their businesses. 

“Even if the markets respond well, I fear mortgage lenders may take some time to reflect positive news in their pricing. We may see further U-turns at this rate,” says Riz Malik, director of Southend-on-Sea-based R3 Mortgages.

“[Kwarteng] needs to reinject confidence in the pound and ease the uncertainty in the financial markets,” says Gaurav Shukla, mortgage adviser at London-based broker Home Me. “The biggest question here is, is he the right Chancellor to take us forward?”

Financial adviser Samuel Mather-Holgate, of Swindon-based advisory firm Mather & Murray Financial, tentatively welcomed the move. “I must credit him with performing a U-turn on clearly the most unpopular policy in the mini-Budget. There are lots of other unfunded tax pledges in this fiscal event, apart from the energy support, so we will see what markets think of this.”

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