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UK Tries To Ease Cost-Of-Living Pain As Inflation Runs Hot – Wealth Managers’ Reactions

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Yesterday’s official figures underscored the UK’s hot inflation problem. Trying to ease some of the pain over rising living costs, such as energy, the Chancellor of the Exchequer, Rishi Sunak, cut some taxes and potentially left room for more reductions later on.

It was a big day on the macroeconomic and fiscal policy front in
the UK yesterday. Finance minister Rishi Sunak sought to
alleviate cost-of-living pain by reducing fuel duties,
reducing thresholds for payroll tax (aka National Insurance
Contributions) and taking other steps. On the same day, official
figures showed that consumer price inflation for February rose by
6.2 per cent from a year before, the highest level since
1991. 

Already, the Bank of England has raised rates; economists expect
more hikes from the BoE and, indeed, the US Federal Reserve and
certain other central banks. Higher rates and strong inflation
challenge wealth managers’ asset allocation assumptions. How
to guard wealth against the not-so-hidden “tax” of falling
purchasing power? Already, “safe-haven” assets such as gold
appear to be making a comeback.

Here are some wealth managers’ commentaries:

Silvia Dall’Angelo, senior economist, Federated Hermes
International

Delivering today’s Spring Statement was never going to be easy
for the Chancellor [Rishi Sunak]. The cost-of-living crisis has
been front and centre since inflation started to climb sharply
last year, there is still significant uncertainty surrounding the
recovery from the pandemic, and the war in Ukraine has pushed
international energy and food prices even higher, making the
prospect of stagflation more real.

The Chancellor had little to offer in the way of relief to
households facing the most severe cost-of-living crisis in
decades, as he moved within the boundaries of the limited fiscal
space he has been left with following the Covid crisis. The
Chancellor announced some targeted and limited measures to help
households cope with higher energy bills, namely a cut to the
fuel duty until March 2023 (worth about £5 billion), a doubling
of the household-support fund to £1 billion and a VAT removal on
solar panels, heat pumps and insulation for homes. However, even
taking into account the previously-announced £9 billion package,
the government’s support for households is a drop in the ocean
compared with the increasing pressures from climbing energy
and food prices. Over the course of the year, households’ energy
bills alone are likely to increase by about £50 billion as a
result of higher oil prices in recent months and utility bill
increases in April and October.

For now, the Chancellor has adopted a measured approach to fiscal
support in response to the current and worsening cost-of-living
crisis. Despite the recent easing, the overall fiscal stance
remains restrictive, and the Chancellor is still trying to stage
a return to fiscal discipline following pandemic-related
largesse. Limited fiscal space has probably compounded with
political calculations, as the Chancellor would probably like to
save some fiscal ammunition to deploy closer to the next general
election in 2024. 

Andy Butcher, branch principal and chartered financial
planner, Raymond James 
 
  
The increase of the National Insurance threshold is a much-needed
move to help household finances, but the absence of an increase
in the secondary threshold, where employers start paying National
Insurance, will hit small businesses hard as they grapple
with spiralling inflation. The employer’s allowance will
save small businesses £1,000, but the 1.25 per cent increase in
employers’ NICs will, in all likelihood, more than offset this
for most small firms. These businesses are drivers for growth,
accounting for 61 per cent of employment and around half of
turnover in the private sector, and so these measures could have
a damaging impact on economic recovery. This is still a tax rise,
and one that is ill-timed and unwelcome for businesses.

Marc Reale, wealth manager, Wilton
The Chancellor’s measures that seek to tackle the cost-of-living
crisis and adjust to growth and inflation forecasts,
unfortunately won’t take the sting out of market instability for
the foreseeable future. It is likely that we will continue to see
conditions change more than usual and more than we would like,
month to month for the rest of the year. Given that the
government has presented a flawed and insufficient plan to curb
the impact of the pressing financial problems at hand, it is
critical, now more than ever, that we thoroughly evaluate savings
and investments to make sure that they are as secure as
possible. 

Rebecca Williams, head of wealth planning, Brown
Shipley

How are these tax cuts going to be paid for? Don’t forget about
Capital Gains Tax and the Pensions Tax Relief which are still
areas in the Chancellor’s toolbox. The can has been kicked down
the road but they might still be on the agenda. We wouldn’t be
surprised to see them mentioned in the Autumn Budget.

A massive curveball was the basic rate of income tax being cut by
the end of the current Parliament in 2024, though this won’t help
anyone right now. The Chancellor has said that this development
has been budgeted, though we do wonder how these will be paid
for. There may also be unexpected developments on the global
stage, which impact fiscal planning. 

Don’t forget, behind the tax cuts, there are significant
increases from 6 April with regard to the Social Care
Levy and dividend tax rises.

Vivek Paul, UK chief investment strategist, BlackRock
Investment Institute

From the Treasury to the Bank of England, policymakers are in a
bind in a world shaped by supply-shocks. Yesterday’s Spring
Statement follows last week’s Bank of England rate hike, and is
set against the backdrop of a cost of living crisis in the UK.
The war in Ukraine is primarily a human tragedy, but it also
levies a heavy economic cost: a new supply shock has been layered
onto the existing one caused by Covid-19, reducing global growth
and exacerbating inflation.

The UK Chancellor’s statement aims to balance the need to be seen
to tackle the UK’s cost-of-living crisis with the desire to
re-establish economic credibility with the electorate. It also
seeks to preserve optionality to deliver crowd-pleasing tax cuts,
which were explicitly flagged, ahead of a general election within
two years. But the room to manoeuvre on policy is narrower than
ever for the Bank and the Treasury – a consequence of the
coordinated fiscal and monetary easing in 2020 that amounted to a
policy revolution. 

The Bank is in a bind because, while it acknowledges that
supply-driven inflation is still likely to rise further, it knows
that overly aggressive tightening could come at too high a cost
to growth and employment. The Treasury, meanwhile, is constrained
by debt-to-GDP at multiples of levels similar to the early
1990s, with surging inflation pushing up borrowing costs.

We maintain our neutral stance on UK equities – we see the market
as fairly valued, rather than cheap, and prefer risk assets in
other developed markets, particularly the USA. In fixed income,
UK gilts are a neutral exposure amid a broader DM government bond
underweight – we think UK yields will not rise as fast as
US equivalents, in part because market expectations for UK
tightening seem excessive.

Sarah Giarrusso, investment strategist, Tilney Smith
& Williamson 

The annual headline inflation continues to reach new 30-year
highs, driven by a number…

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