Jeremy Hunt just put down a deposit on his government’s credibility. Whether the balance is paid on the country’s reputation depends on how well he spins the plates of ‘stability, growth and public services’ now. The fact is the balance the Chancellor talked about is not tax vs public spending, it’s the bond market’s opinion vs the cost of living crisis.
“The market showed Truss and Kwarteng exactly what it thought of the last round of tax plans, last week was all about righting those wrongs and getting investors back onside,” said Dan Lane, a senior analyst with Freetrade. “It’s hard to argue with high and middle earners shouldering most of the tax burden but dividend and capital gains allowances have been dismantled.”
Immediately, dividend investors get slammed and will pay an extra £87.50, £337.50 and £393.50 according to their tax bands and the picture’s only going to get worse for them. But, while tax raises will annoy the well-off, inflation threatens low income earners the most.
“Taking a hard line on windfall taxes has come laughably late though and took the nation to be squeezed to the point of bursting,” added Freetrade’s Lane. “It’s also puzzling the chancellor saw it fit to punish electric vehicles too, and how quickly that policy came in compared to the months of trying to avoid taxing the oil and gas giants.”
The UK needs more than tax hikes to get the economy back on track
For evidence, look no further than London’s latest fumble, losing the coveted title of Europe’s most-valued stock market. A very weak pound, a recession, and an inability to attract new companies are plaguing the nation’s mid cap companies. With UK purchasing power down, they’re the ones taking the biggest hit. Without much, if any, international revenue, mid caps are in an increasingly tough spot.
Aside from the UK, every other G7 nation has mustered up enough growth to achieve GDPs beyond their 2019 levels. Meanwhile, the UK hasn’t even managed a recovery, let alone growth.
“A fundamental part of the UK’s ability to do so will be attracting a wider range of businesses to list in the UK,” said Gemma Boothroyd, analyst with Freetrade. “That means looking outside of the UK in hopes that those companies can help those already established within. It’s particularly vital for the UK’s mid cap list. For now, the LSE is full of companies which will continue to struggle as Britons are squeezed more from the additional tax burden. If corporate tax is supposed to offer any additional relief to the economy, that sure seems unlikely with the way things are going now.”
If the LSE can muster up intrigue from firms that earn most of their revenue outside of the UK, the exchange might be able to reclaim its status. After all, these are the firms that can actually benefit from the weak pound. And with that outside support, the UK economy can slowly but surely get back on track.
Expect volatility in Sterling to be driven by the Dollar now
“As Hunt ushers out the era of Trussonomics, which tried to stimulate the economy too quickly, there is an equal and opposite risk that the chancellor depresses the economy too quickly, which could cause yet more economic and political upheaval,” said Giles Coghlan, Chief Market Analyst at HYCM. “Hunt tried to deliver a statement that avoids both extremes. On balance, this was as good as it could have been.”
The GBP sold off initially on the OBR’s projections for GDP to not return to growth until 2024, but the reaction was marginal. The GBP is most likely to be pushed and pulled around now on the latest USD news, as the UK budget was fully priced into the market and pretty much as expected. The UK Chancellor will likely be breathing a sigh of relief now.
Energy sector takes a hit
Share prices of energy generating companies retreated rapidly as it became clear that the Treasury will scoop up more money which has been falling into their profit baskets as gas prices soared. A much bigger slice of profits of energy giants such as BP LON:BP. and Shell LON:SHEL will now also be raked in, with the energy profits levy increased from 25 per cent to 35 per cent. The door was inched open even further on the case for a windfall tax following comments made by Shell’s outgoing boss, Ben Van Beurden, that the tax burden had to fall on the energy sector to help the poorest in society. That’s partly why the reaction has been relatively muted in terms of their share prices.
Wind farm operator Orsted had already said such a tax is fair if companies are making windfall profits from current high energy prices. However, it along with other generators had already hedged the price of their output well in advance of the current crisis, so won’t have benefited fully from the surge on international exchanges, so the nuances of how the tax will work will be important. Now rumours of the levy on electricity generators have become reality shares have fallen back further.
“There will be concern this may lead to lower investment into renewables but given the clamour for acceleration, companies could be hit by ethical investor headwinds if funding of greener cleaner projects is scaled back at a time when large dividends are still paid out,” explained Susannah Streeter, senior investment analyst at Hargreaves Lansdown. “The time limit set is important and will help with certainty for investment horizons. BP had initially warned it may scale back North Sea investment after the first windfall tax was announced but then rowed back on that once a clearer timescale was set.”
For the government there is a risk that energy prices will continue to fall back, which will limit what can be creamed off. Brent crude has dropped back to below $92 a barrel as worries about weakening demand have risen and geo-political tensions have eased a little. Gas prices have also retreated, and are around 70% below the summer peak, but they have been highly volatile and may tick back upwards as cold weather is set to sweep into Europe.
