At least one international banker is already calling for an "emergency rate increase"
On Friday, before Kwasi Kwarteng had even finished his ‘mini’ budget presentation, high-fives were being exchanged on one of the City’s largest trading floors. Both the axing of the 45% tax bracket and the cap on bonuses were being wildly welcomed.
“A tax cut puts more money in our pockets just when we need it,” one trader told The Times. “We have locked-in outgoings — school fees, mortgages — and so this will be a real help.”
But as some of London’s bankers celebrated, shock waves from the biggest round of tax cuts since the disastrous Bevan cuts of 1972 had started to ripple out through financial markets.
After an initial rise, the pound started to fall, slipping 3% during the day against the US$ to a 37 year low. And with Martin Weale, a former Bank of England policymaker commenting that the Chancellor’s plans will “end in tears,” George Saravelos a leading analyst for Deutsche bank called on the BoE for an emergency meeting to raise rates.
"We’ve been expressing our concerns about UK external sustainability for a while,” he said. "The very large, unfunded tax cuts and other fiscal giveaways announced by the UK chancellor a few minutes ago only strengthen our worries.”
But despite some financiers’ concerns, closer to home it appears that initial feedback from our industry is positive.
“I think the mini budget, and especially the stamp duty changes, has brought a sense of hope and further commitment to the growth of the economy and adds weight to the Government’s pledge to get more people on the property ladder” Sarah Tucker, The Mortgage Mum told us.
“Stamp duty is a huge cost to our clients, and this permanent deduction is promising news for many,” she enthused. “I know the budget has faced criticism - you can’t please everybody - but I feel hopeful and positive, and it has certainly given me an initial feeling that Liz Truss is really here to make some change!”
One of the more important handouts in the budget was the Government’s decision to raise the stamp duty threshold from £125,000 to £250,000 in England and Northern Ireland. Although the biggest effect of the cut will be to make sure that buyers under the threshold will pay none of the tax, buyers above that threshold will still be £2,500 better off.
First time buyers will see their new threshold raised from £300,000 to £425,000. The threshold change means that nearly 70% of homes currently listed on Rightmove will not attract stamp duty for them.
“Cuts to stamp duty will get the housing market moving and support first-time buyers to put down roots,” Kwasi Kwarteng said when delivering his changes.
And Jamie Lewis, MD of Affinity Mortgage Group, is also very happy about the new budget.
“I was extremely pleased to see this new budget, and to me this is the most forward thinking for quite some time,” he told Mortgage Introducer.
“When you think back through political history, the Tory way was for homeownership to be at the forefront for as many people as possible and with this budget it feels that perhaps for the first time in a long time the government has recognised this,” he said. “Personally, the fact there is not an end date and actually just some nil rate band movement looks to me like finally we are looking forwards and not back.”
The stamp duty cuts, however, look like they will have the biggest effect in the country’s most prosperous areas.
“The stamp duty cut will also make a significant difference to house purchases in London and the South East,” said The Resolution Foundation in a statement. “It will reduce the tax bill on the sale of the average first-time buyer home in London by £6,300, compared to no gain for the average first-time buyer in the North East.”
It’s been 50 years since tax cuts this big were introduced by the Heath Government. Petrol was around 8p a litre, the average house price was £5,158 and you could buy a Mark III Ford Cortina for £973.
Immediately after the tax cuts, the economy started to pick up speed - The National Institute for Economic and Social Research said it could see “no reason why the present boom should either bust or have to be busted”.
House prices surged too – reaching £6,960 by the end of the year, swiftly followed by rising mortgage interest rates. By December, minimum lending rates had reached 9%.
But as we’ve mentioned above, things did not end that well. It was only a few months before Barber had to cut the pound free from its fixed exchange rate – it plummeted 15%. Inflation soared, wage demands followed, and Heath’s Government lost the election that followed two years after the tax cuts.
It remains to be seen whether the outcome from these tax cuts will echo those of 1972, but in the short term at least, it appears that we may see another burst of business.