In a press conference held this afternoon, a nervous and uneasy sounding Prime Minister Liz Truss has announced the latest ‘U’ turn to the ‘Fiscal Event’ announced just a few weeks ago. It is a highly important speech which the markets will have been watching very closely.
During her very short statement, Truss announced that her government’s planned reversal of the rise in corporation tax will now revert to the original plan put forward by the Chancellor Rishi Sunak – that it will increase to 25% from April 2023. It is estimated that this means a reversal of £18bn of tax cuts which would otherwise have occurred.
She also confirmed the appointment of Jeremy Hunt as the new Chancellor of the Exchequer, replacing Kwasi Kwarteng who stood down earlier today as requested by the PM.
She reiterated her plan to ‘restore economic credibility” on many occasions.
Truss also said that public spending will not grow as rapidly had been planned. It is likely that there will be much debate as to exactly what this actually means in practice.
Finally, there was no apology given during her short speech, something which may cause some concern to the markets.
Truss then only answered a couple of questions from journalists – very briefly – before calling a somewhat abrupt close to the session.
We now await the verdict from the markets as what Truss has said today leaves many questions unanswered and seems to have given little to reassure them to the extent that would have been anticipated.
Katharine Arthur, Partner and Head of Private Client at haysmacintyre, comments:
“Today’s announcement that the Corporation Tax rate will increase to 25% from April 2022 marks the second major U-turn in less than a month, which begs the question: how many more will there be? The rationale behind today’s move is obviously to repair confidence in markets and in the Pound, but whether it will be sufficient is unclear, especially given that a 6% increase in CT will undoubtedly be challenging for companies attempting to deal with the wider cost increases and rise in interest rates.
“Ultimately, confusion and uncertainty do not breed confidence, and without a clear sense of direction we are likely to see continued anxiety amongst markets, businesses, and individuals. Businesses and the economy need clarity and given that we still lack the essential OBR forecasts, and with the fourth chancellor in a year set to move into 11 Downing Street, it is hard to see where this will come from.
“The ‘mini-budget’ was originally based on the hope of economic growth, but growth is only possible with confidence and the ability to formulate long-term plans. The UK is currently shouldering the greatest tax burden in decades, and with the freezing of thresholds and rising inflation, alongside multiple U-turns, this burden is growing heavier by the day. ‘Uneasy lies the head who wears the crown’, and those in power must move swiftly to exchange complexity and uncertainty with simplicity, transparency, and reassurance.”
Danni Hewson, AJ Bell financial analyst, comments on the government’s decision not to go ahead with its mini-budget corporation tax freeze:
“As U-turn’s go it’s a doozy. The freeze in corporation tax wasn’t something most households were talking about around the dinner table, but it was the jewel in the crown of the new PM’s plans to super charge UK economic growth. By allowing companies to keep more of the profits they make, Liz Truss and her former chancellor were banking on that to act as a way to lure more foreign investment and to convince UK based companies to grow right here.
“It may have, temporarily, been an incentive for businesses to overlook the tangle of red tape and additional costs associated with trading in a post Brexit world. But at what cost? Companies had already priced in the new tax rates which had been well signposted and at 25% the UK will still be competitive.
“And there are approximately 18 billion reasons not to go ahead with the freeze. £18 billion is now expected to swell government coffers, which will help to offset the rising cost of borrowing and additional spend required to deal with the energy crisis.
“Markets were terrified that the ‘mini-budget’ was unfunded and fiscally irresponsible. The new regime was untried and seemingly unwilling to follow the accepted playbook for updating, in this case upending, fiscal policy.
“If the government thought it could ride out the tsunami of economic instability it wasn’t paying enough attention to the numbers, and when the numbers start pummelling the voting public governments can’t focus on anything else.
“The writing was on the wall when markets surged in anticipatory delight on the news that another post budget U-turn was imminent and moves on corporation tax have gone a long way to bolstering sentiment today. But it’s a sticking plaster that’s already curling at the edges.”