Talk about hitting the ground running.
The fiscal announcement made by Chancellor Kwasi Kwarteng last week turned out to be the biggest package of tax cuts for the last 50 years, as part of his plan for Economic Growth. On the surface you would expect such a stimulus to be both popular and positive, but how good will it turn out to be for the MI Sector?
I have picked on five talking points from the statement to gauge the possible benefit;
Support for Non-Domestic Energy Users
As far as commercial chatter goes, the Cost of Living Crisis is pretty much the only game in town at the moment. We will get onto how it is going to impact demand in a moment but the bellwether as far as cost base challenges is clearly that of energy rates.
The capping of charges for non-domestic use will be a big help to many businesses and remove some of the uncertainty they were facing over the coming months. The scheme itself seems comprehensive and should operate almost invisibly in the background, both of which are welcome though it would have been nice if it had been guaranteed for a longer period of time than the initial six month phase.
Corporation Tax, N.I & Business Rates
The cut in Corporation Tax isn’t actually a cut, but rather the cancellation of the planned rise to 25% (from 19%) next year – but accepting that technicality, it will be a positive for businesses that had begun to factor it in. The hope of course is that businesses will re-invest this higher proportion of retained profit to stimulate growth and create jobs. The rolling back of the 1.25% rise in National Insurance will also help by reducing Employer Contributions from November.
The elephant in the room though is Business Rates, where fundamental reform has been promised for years only to be continually kicked into the political long grass. Business Rates are set to jump by around 10% next year which will have a real impact on bottom line costs. A cut in Corporation Tax is all well and good if you are making a profit, but for many businesses getting past break-even may be the real challenge.
Spend or Save
What we do know is that the Chancellor is trying to reduce the strain on household budgets. By putting more money back into people’s pockets whilst providing the security of capped energy costs, the hope is that consumer spending will not fall off a cliff over the next six months,
The challenge of course is that for many energy costs have still risen dramatically, and the actual benefit of the combined tax cuts is still modest for many income groups. Factor in rising interest rates, and double-digit inflation, and it is difficult to see what will be left for the kind of non-essential spending that fuels the MI market.
Higher Income bands do seem to have done disproportionally better out of the measures announced, so we need to hope that is where the shopping frenzy takes hold.
VAT Free Shopping
The announcement of tax-free shopping for tourists will bring the UK back in line with other European nations. It disappeared back in January 2021 as part of new arrangements post-Brexit, and on the surface, its reintroduction doesn’t seem to have any real downsides to it.
As it happens I have been having conversations about this recently, trying to ascertain how important an issue many thought it really was. The consensus of opinion is that it is something that in most cases it was a nice to have, and certainly something we should never have given up, but that is was around the periphery in terms of must have. It will undoubtedly help tourist hotspots, and particular product categories but I think the jury is still out on its real importance to MI.
The Reaction of the Money Markets
The immediate response from investors has been fairly negative as the Pound has slumped to a new low against the Dollar.
Of course, this is a win-lose scenario, as pretty much everything seems to be when you talk about economic levers. It’s a win for those that primarily export as UK product is becoming increasingly competitive on the world market, as it is for those tourists that now get more bang for their buck when visiting our high streets.
The downside tough is that many products in the MI space are priced in Dollars, so we can expect a new wave of price increases in the run up to Christmas.
There are so many different ways to analyse where we are, that is hard to see any kind of magic bullet. The fact that the Government to trying to gee up the economy at time when the Bank of England is desperately trying to calm it down, is a little counterintuitive, but only reinforces the challenges we are facing. Time will inevitably tell how many of the bumps in the road last week’s measures will help flatten out.
