Following yesterday evening’s somewhat surprising news that two of Boris Johnson’s cabinet ministers – Javid and Sunak – were resigning their positions, investment and tax experts share their views with us. In particular, they comment on what the appointment of Nadhim Zahawi to replace Rishi Sunak as Chancellor, might mean for future economic policy.
Richard Carter, head of fixed interest research at Quilter Cheviot believes Zahawi will come under pressure to cut taxes commenting:
“Markets are playing close attention to the unfolding drama in British politics although arguably have bigger things on their mind with rising interest rates and the impending threat of recession. Given the rapidly changing events, it is unlikely that the new Chancellor Nadhim Zahawi will have long to put his stamp on economic policy before a leadership election is triggered.
“However, he will almost certainly come under pressure from Johnson to cut taxes in an attempt to try and boost economic growth (as well as please voters) even if that puts further strain on the public finances. The main priorities for the Chancellor should be to boost productivity in the economy, address the challenges raised by the Brexit deal and bring inflation down in conjunction with the Bank of England but an end to the Tory infighting is probably necessary first.”
Julia Rosenbloom, tax partner at Evelyn Partners, the leading integrated wealth management and professional services group created from the merger of Tilney and Smith & Williamson, highlights that “nothing is off the table” as she comments on possible changes to the tax regime by the new Chancellor:
“It’s only Nadhim Zahawi’s first full day in the job as Chancellor but he’s already commented that ‘nothing is off the table’ when it comes to possible changes to the tax regime. To help him stamp his mark as Chancellor, it’s quite possible that Zahawi may want to hold an emergency or early Budget where a different direction in tax policy could be announced.
“The government has been under pressure for some time to help families with the cost of living crisis so this is something Zahawi is likely to address in the next Budget, whenever that is held. However, we don’t know what, if any changes, the new Chancellor will make to taxes in general, such as IHT, so the need for families to take a close look at their tax planning and take professional advice has never been more important.”
Commenting on the market reaction to Rishi Sunak’s resignation as UK chancellor, Mike Owens, UK Sales Trader at Saxo Markets, said: “The resignations of senior members of Boris Johnson’s cabinet yesterday evening – including Chancellor Rishi Sunak, throw even more uncertainty towards the government and how it plans to deal with a growing list of economic problems.
“The pound continued its decline and traded at a two-year low against the dollar and has even underperformed the euro over the past three months, while the eurozone copes with its own problems thrown up by the Ukraine war and the energy price crisis.
“The Chancellor’s resignation came on the same day as the Bank of England’s latest financial stability report, which warned that the economic outlook for the UK and globally has deteriorated with concerns UK households and businesses will struggle to pay outstanding debts.
“Sterling has failed to pick up so far this year – falling 11% year-to-date against the dollar as the UK faces one of its worst threats to the economy in decades, this is just adding to rising inflation through the price of food, petrol and imported goods affecting millions.
“International forecasters have said Britain is more susceptible to a recession and persistently-high inflation than other western countries, all of whom are grappling with global energy and commodity market shocks. The Bank of England’s falling GDP projections this year have also somewhat paralysed investors with many left trying to predict the future and knocking market confidence.”
Commenting on what she sees as Nadim Zahawi’s priorities as the new Chancellor, Rachael Griffin, tax and financial planning expert at Quilter said:
“Although commentators have been proved wrong time and again when it comes to Johnson and his cabinet’s resilience to weather political storms, the resignation of Sunak and Javid may prove too much to handle.
“It is plausible that Zahawi as the new chancellor may compete for the shortest serving if the government collapses, a title that currently rests with Ian Macleod who in 1970 served for just a month.
“The crux of the matter is that any proposals put forward by Zahawi are unlikely to see the light of day, however sensible they are, as there will not be enough support form his own party. All at a time when we need a strong government to get us through the cost-of-living crisis.
“Conservative MPs will be well aware that public opinion on the current government is at an all-time low. While Johnson limped through the recent vote of confidence, many will loathe to allow him and Zahawi give away to the electorate the crown jewels of lower taxes when neither are electable.
“Instead, the Tory party will want the new incumbents, whoever they will be, to have the flexibility to be able to offer giveaways to restore public opinion in the wake of a torrid period for the party. Why let them use up all the ammo when the next in line will need that fire power?
“However, if Zahawi proves able to stay in the role it’s important that he doesn’t underestimate the electorate who are rapidly waking up to the stealth taxes employed by the current government such the various frozen tax thresholds which are dragging more and more people into paying income tax, and pensions and inheritance taxes. The government need to make public spending far more efficient before they start collecting more taxes.
“A relatively simple and crowd-pleasing policy Zahawi should consider first is to amend the threshold at which the high-income child benefit (HICB) charge comes into effect, removing basic rate taxpayers from getting caught by the charge during the cost-of-living crisis.
“Child benefit is not means tested and if one earner in a family makes more than £50,000 a year, they must pay back 1% of the Child Benefit they receive for every £100 over the threshold. However, a basic rate taxpayer can earn £50,270 before falling into the higher rate band, meaning basic rate taxpayers are currently in scope for a tax charge aimed at higher earners.
“Given the cost-of-living crisis is hitting lower and middle-income households, the government could provide some quick relief by simply pegging the HICB threshold to the higher rate income tax threshold. The UK tax system is already complicated at the best of times. Failing to have the HICB charge aligned with income tax bands just makes things even more complex and will catch a lot of people unaware.
“Similarly, Zahawi as former education minister will be well aware of the difficulties that working parents have with funding childcare for their children. The government need to urgently look at the childcare vouchers system as making this work better would take a significant degree of strain off parents. He has already expressed an interest in simplifying the support schemes for families, especially tax-free childcare, which is worth up to £2,000 a year but has very low take-up because many find it too bureaucratic. It was introduced to replace employer childcare vouchers in 2018, but covers only an estimated 300,0000 out of 1.3 million eligible children.”