Morning Brief – This lady is for turning

Charles Porter
Tue 4 Oct 2022

This lady is for turning


Yesterday the government made a U-turn on some of the headline taxation policies announced during the mini budget late last month. The focus of the rollback was on the 45% additional taxation rate recently announced by the Chancellor to be on the chopping block from April next year. The policy was in the crosshairs due to a focus upon supporting high earners during a time of widespread economic tumult but also as one of the more expensive components of the recent reshape of the taxation schedule. The move was increasing anticipated over the weekend with the Chancellor suggesting in a conference organised by the Telegraph that that a reversal may be in order.


The taxation shake-up shook gilt markets and the Pound forcing the Bank of England to step in to control the yields implied by the pricing on long dated UK paper. So in theory a reversal of those policies could have restored GBP and UK implied yields back to the levels seen before the mini budget. Unmistakably, Sterling was bid yesterday trading higher on its major crosses. But there was no such relief rally to suggest that the market turmoil catalysed by the incumbent government had been unwound and forgiven in full. So why did a reversal of one of the key policies that created the impression of fiscal imbalance and that demanded additional government borrowing to finance not create a full retracement in the Pound and other assets?


Well perhaps the most obvious reason is that the net taxation burden as a result of the remaining elements of the tax overhaul announced by the Chancellor is still higher than it has been in many previous administrations. Maintaining policies including scrapping the increase in corporation tax, continuing to pursue a lowering of the basic rate of taxation and the big government approach to the cost-of-living crisis are all costly and fiscally burdensome policies that gilt markets will still have to accommodate. Therefore, as a result of the remaining policies still at work in the Truss government, it is right that yields on government paper have not come down to pre-budget levels as the fiscal outlook is still different than it was before those announcements.


Secondly, we have to look at the reason why the government backed down from the planned scrapping of the additional taxation rate. It was unlikely to be the media commentary or public backlash to the measures that swayed the Chancellor and Prime Minister themselves. Instead, it was becoming increasingly apparent that the government may not be able to get their own budget and fiscal plans through parliament successfully despite their party commanding a majority in the Commons. If a government may not even be able to get its budget approved by parliament, there is clearly an element of political risk there making the political outlook for the UK less stable than we might have thought for the next two years at least. It is an element of political risk and an air of caution that are therefore keeping the Pound suppressed also from pre-budget levels.




Discussion and Analysis by Charles Porter

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