Written by Danni Hewson, AJ Bell financial analyst
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.”
AJ Bell head of retirement policy, Tom Selby: “There are two things you really don’t want to mess with as a Prime Minister and Chancellor – people’s mortgages and people’s pensions. In the space of little more than two weeks, Liz Truss and Kwasi Kwarteng have poured fuel on the fire of the mortgage market – with people’s monthly repayments going up by hundreds of pounds – and made people worry their pensions were at risk.
“In reality, of course, people’s pensions were always safe, but perception counts for a lot. This Government’s decisions caused panic in the bond markets which led to hugely damaging ‘pensions crisis’ headlines. Repairing trust and confidence in retirement saving will be a huge job on the back of this period of high uncertainty.”