UK Budget: "Responsible" Tax Cuts

Trailing 20 points in the polls, the UK's Conservative Party has sought to attract voters back with tax cuts it can ill afford.

Personal and business tax cuts were seen as a popular move in the Autumn Budget report.

It's Budget Day in the UK, which means the Chancellor of the Exchequer is unveiling new spending priorities. The aim is twofold: To balance the country's books, while giving enough away to taxpayers to convince the electorate to vote for the incumbent Conservative Party—which is badly trailing in the polls—in next year's General Election.

UK Poll of Polls
The governing Conservative Party is trailing around 20 points in the polls

A Low Bar For Success

Chancellor Jeremy Hunt's job is an unenviable one, given the economic backdrop. The UK has suffered persistent inflation, and although that is finally coming down, there is little room to maneuver. While income from taxes has been higher than forecast, expenditure is also high, due to the level of debt that must be serviced at high interest rates.

However, his predecessor, Kwasi Kwarteng, set the bar very low. Last year, he and then Prime Minister Liz Truss unveiled a disastrous mini-budget. Their "pro-growth" strategy entailed huge, uncosted tax giveaways intended to stimulate the economy, but that spooked the bond markets so badly that the Bank of England was forced to step in to prevent a number of pension funds from going bankrupt and led to Truss being ousted as the UK's shortest-serving Prime Minister.

By contrast, Hunt's job was relatively straightforward: Don't drop the ball.

Tax Giveaways

Prime Minister Rishi Sunak said the government had taken "difficult decisions" to control inflation, such as not giving in to demands for pay rises from striking health service employees. "That's why we can now can move on to the next phase of our economic plan and turn our attention to cutting taxes," he stated. "We will do so seriously, we will do so responsibly, but that time is now here."

Given the background of the catastrophic Truss/Kwarteng announcement, pitching this Budget well was a tightrope walk. Realistically, there is little the party can do to attract back sufficient numbers of voters to remain in power. Avoiding annihilation is the best they can hope for. And yet even that would require something spectacular—but the penalty for appearing to be fiscally irresponsible would be enormous.

In the event, there were small adjustments to personal taxes and business taxes. National Insurance, which is charged to employees at 12% on earnings between £12,571 and £50,271 (and 2% on earnings above that) will be cut to 10%, from January 2024. The minimum wage or "National Living Wage" will increase from £10.42 to £11.44 per hour from April 2024.

An existing allowance for businesses was also made permanent. For every £1 that a business invests in IT, machinery and equipment, they are able to claim back £0.25 in corporation tax.

Sterling fell slightly in response to the announcements.

GBP-USD chart, TradingView
The pound weakened slightly on the Budget news.

It won't be enough for them to win the next election, but neither will it crash the economy. At this point, that's a good result.

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