Back in the sultry days of July, Conservative leadership candidate, former chancellor and now backbench MP Rishi Sunak, told Liz Truss during ITV’s hustings show that her plan to borrow more to fund tax cuts could lead to mortgage rates going up to 7%.
“Can you imagine what that will do for everyone?” he asked, looking suitably alarmed. “That’s thousands of pounds on their mortgage bill. It will tip millions of people into misery. It’ll mean we’d have no chance of winning the next election.”
Truss retorted: “I don’t believe in this negative, declinist language”.
Sunak shouted: “Your own economics adviser told you this”.
At the time Sunak’s urgency and interruptions seemed to attract more negativity than Truss’s economic policies.
As various politicians now attempt to shift the blame for the deepening economic crisis since last week’s not-so-mini-Budget, it’s important to measure the results of policies against what was promised. However the government paints the long-term benefits to business and growth, surely it was not intended for the state bank to have to intervene to protect millions of pensions and for the value of the pound to sink alarmingly?
The markets appear to agree with Sunak’s observations. Yesterday, the Bank of England was forced into emergency action to halt a run on Britain’s pension funds. Threadneedle Street said the fallout from a dramatic rise in government borrowing costs since the chancellor’s statement had left it having to step in and protect the UK’s financial system.
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City analysts said the move, less than a week after Truss and chancellor Kwasi Kwarteng’s tax cuts, was needed to halt a “doom loop” in the bond markets.
The crash in the government bond market brought some pension funds close to running out of cash, the Bank said, as they faced demands to meet margin calls on complex derivatives they had bought to cover their pensions liabilities.
Interest rates on government bonds, also called gilts, have risen sharply since the mini-Budget. This is said to have made it punitively expensive for thousands of pensions funds to fund their hedging activities.
Implications for pensions
Although the Bank’s intervention will have removed the immediate threat of defined benefit schemes being left unprotected if gilt yields had continued to spiral out of control, managing continuing risks will pose a challenge for companies with such schemes. Provided the employers sponsoring the pension schemes remain solvent, there is no risk of members’ pensions not being paid in full, however.
Overall, the funding of final salary schemes has improved this year due to the rise in interest rates, with two-thirds of the UK’s 5,200 defined benefit pension funds now thought to be in surplus.
Most UK workers with pensions are members of defined contribution schemes, building up a finite “pot” of money to fund their retirement that can be accessed from the age of 55. Although members can decide where their money is invested, the default option is typically a blend of equities, bonds, gilts and other assets. Anyone checking their company pension account or self-invested personal pension (Sipp) is likely to see double-digit percentage fall in its value in recent months. This has been compounded by the fallout from the mini-Budget.
The Financial Times said this would have less of an effect on younger investors, whose money will be locked up for decades to come, than on older workers approaching retirement, who can flexibly access their funds.
“If you were going to buy an annuity, while the value of your pot will have decreased, rising interest rates means annuity rates have improved [by more than 35 per cent in the past year],” Sir Steve Webb, former pensions minister and partner at LCP, the consultancy, told the newspaper.
He added that retirees who were intending to stay invested in the markets, and drew down an income from their pot, had lost money. “There’s no quick fix,” he added.
Data from HM Revenue & Customs on Wednesday showed that retail investors were accessing their pension savings in record numbers. In the second quarter of this year, more than half a million people withdrew a total of £3.6bn from their pensions, a 23% year-on-year increase.
“We have never seen more than £3bn accessed [in a single quarter], let alone more than £3.5bn,” said Stephen Lowe, director of Just Group, the retirement specialist. “The underlying worry is that people may be taking a chunk out of their pensions for the first time to tide them through the cost of living crisis, but are unaware of the long-term consequences.”
A Treasury spokesperson, managing to avoid any mention of the mini-Budget, stated yesterday: “Global financial markets have seen significant volatility in recent days. The Bank has identified a risk from recent dysfunction in gilt markets, so the Bank will temporarily carry out purchases of long-dated UK government bonds from today in order to restore orderly market conditions. These purchases will be strictly time limited, and completed in the next two weeks.”
Recalled from the cricket
It was reported that officials in the Financial Services Group of the Treasury were at an away day at the Oval cricket ground in London on Wednesday, but were asked to return to their desks that afternoon.
Treasury minister Chris Philp told Sky News that the government would not reverse its proposals. In a further interview on ITV’s Peston, he confirmed that ministers had not decided whether state pensions and universal credit would be uprated in line with inflation this autumn, which had been promised by Rishi Sunak when he was chancellor.
This morning, Truss took to local radio to defend Kwasi Kwarteng’s mini-budget, saying she was prepared to make “controversial and difficult decisions” to get the economy moving.
Many Conservative MPs have voiced disquiet about the mini-Budget. Among them, Simon Hoare, the Tory MP for North Dorset, said “These are not circumstances beyond the control of government and Treasury. They were authored there. This inept madness cannot go on.”
The TUC, more predictably, also took a dim view of proceedings. Its head of economics Kate Bell said: “The Bank’s intervention should tell the government that this budget must be reversed to protect Britain’s families and businesses.
“We need a new budget focused on stabilising the economy and getting wages rising. Not one that puts the UK at risk for the sake of tax cuts for the rich.”
Some employers’ groups were initially positive about the mini-Budget. The Institute of Directors’ Kitty Ussher said last Friday: “This is a good news day for British business. In a time of low confidence and economic uncertainty, the new chancellor’s emphasis on going for growth will be very welcome to firms of all sizes across the UK”.
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The changes on IR35 were welcomed by the IoD, as well as the reversal of the national insurance rise, scheduled to take effect on 6 November. However, Ussher said: “We are concerned that the chancellor had not asked the OBR to undertake its usual independent assessment of the impact of its proposals on government debt and the wider macroeconomy. Without this, neither businesses nor parliament have the reassurance that the scale of this intervention is affordable and so does not jeopardise overall economic stability.”
She also confessed to being mystified by ministers’ change in direction on skills shortages: “We were also disappointed that the previous chancellor’s workstream to use the tax system to incentivise workplace training to address skills shortages appears to have been abandoned, and that there was no mention of making capital investment super-deduction permanent or incentivising smaller businesses to play their part in decarbonising the economy.”
CBI view
For the CBI, speaking yesterday, director-general Tony Danker said macroeconomic stability was a “precondition” for ministers to embark on their plans for significant supply-side reforms and that businesses were concerned about the inflationary pressures and national debt levels arising from the tax cuts.
“After Friday, they have to do more,” said Danker, just as the Bank of England stepped in.
He told the Financial Times: “I do not – like some – blame the markets, or blame business leaders for being anxious. They are behaving with legitimate concerns, and entirely logically. [The government] has to demonstrate its credentials on inflation.”
He added that businesses liked the fact that a government “for the first time in quite a while is interested in pro-growth, pro-business, pro-investment. But they are anxious, in the same way that the markets are anxious, about inflation and about medium-term fiscal data.”
Danker urged ministers to set out a plan to open up the country to immigration so that labour shortages in various sectors could be addressed. “It’s absolutely a barrier to growth – I can tell you 10 companies who in the past few weeks have told me ‘I’m not investing’ or ‘I’m not growing because I just can’t get the people’,” he said.
Danker also pointed to the need to abandon “scepticism on net zero” and tackle planning reform “once and for all”, saying priorities could change quickly.
He said the move to freeze corporation tax at 19% may not “stimulate lots of business investment in the next year”, but added that it would “over time, compared to other countries, play a role in attracting investment”. The move to scrap the bankers’ bonus cap was unexpected, he said. “It would not have been in the top 10 list of reforms,” he added.
Employees’ perspective
CEO of payroll firm PayCaptain, Simon Bocca, argued that the financial security of staff was becoming the biggest issue for employers given that research had shown 77% of employees said money worries impacted them at work.
Bocca added that productivity would suffer as a result of employees’ heightened fears over the cost of living. He said: “It’s well documented that productivity will be adversely affected when people are worried about their financial health.
“They’ll be asking themselves what it could mean for them, and for those whose finances were under stress before the current crisis, they will be deeply worried by all the media coverage and adverse predictions they’re hearing.
“All of this is bound to affect business productivity.”
This suggests that while employers may savour measures such as the reversal of the planned corporation tax rise, it is employees, with mounting concerns over the cost of living, stagnating wages, mortgage rates and inflation, who may decide the future of the reforms. If productivity worsens as a result, then the tax giveaways to the more wealthy will look hollow indeed.
Julia Kermode, founder of independent contractor organisation IWORK, said the newly announced Royal Mail strikes could be a sign of things to come: “What did the government expect? In the mini-Budget, the chancellor promised to make it more difficult for workers to strike. Less than a week later, amid soaring inflation and huge economic uncertainty created by his potentially disastrous fiscal package, Royal Mail workers confirm they will strike at the busiest time of the year.”
Perhaps it’s not the employers, but the employees who will determine this country’s economic future in the coming months.
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