After an understandable period of political silence that began with Boris Johnson’s resignation and was extended due to the death of Her Majesty the Queen Elizabeth II, this week has seen an unsurprising torrent of political activity. Top of the agenda has been today’s mini-budget which contains a raft of measures designed to address the nation’s mounting economic concerns.

Opinion is already split on Kwasi Kwarteng’s strategy. The currency markets have reacted negatively with sterling falling to a 37-year low against the dollar of $1.11. This is despite yesterday’s 0.5% increase in the Bank of England base rate designed both to cool rampant inflation and prop up the value of the pound. On the other hand, Conservative backbenchers and many who are to benefit from what are the biggest tax cuts since Lawson’s 1988 budget - some £45bn by certain estimates - cheered the Chancellor with gusto.

Kwarteng inherits a perilous position. The impact of Covid-19 remains ever present in the economy. Whilst the disease itself in the UK is under control of sorts, the impact on global supply chains is still biting hard. Next, pile on top of this a lack of labour driven both by Brexit (yes, remember that) and a huge number of people taking themselves out of the labour market since Covid (unemployment as a percentage of this contracted pool is at an unhealthy low of just 3.6%). Then, just to add some spice to the cake mix, Russia’s decision to invade its sovereign neighbour in February this year, and the West’s reaction, has driven energy prices to unimaginable highs. Add all this together and the headwinds for UK PLC look more than challenging.

"It could be seen as a massive gamble."

So, Truss and Kwarteng have decided to take some significant and steps in an attempt to stimulate growth in an economy many fear is already in recession. It could be seen as a massive gamble, especially when the cuts are comparable to those made by Barber in his 1972 budget, which didn’t end well. That budget fuelled both inflation and wage demands leaving the country ill prepared for the oil crisis and the associated deep recession through 1973-1975.

Headline grabbers that will come as immediate relief to businesses already facing this ‘perfect storm’ are a reversal of the 1.25% increase in employers NIC that began in April 2022 (effective from November 2022); a reversal of the planned Corporation Tax rate increase from 19% to 25%; making permanent the Annual Investment Allowance increase from £200,000 per year to £1m per year that was first introduced in 2018; and the capping for the energy price for business at £211 per MWh for electricity and £75 per MWh for gas, which is less than half the current wholesale prices.

However, the sting in the tail to all this is the impact the huge amount of government borrowing will have on sterling. As a nation we are a net importer of goods, net exporter of services. With the fall in sterling, imported goods are getting ever more expensive for UK business and consumers and are inflating rapidly as most of the developed world grapples with its own inflationary issues just as our buying power is decreasing. On the services side, the reduction in sterling may indeed attract further investment in the UK making our offerings even more attractive to our overseas trading partners. No doubt Kwarteng, an extremely well-educated individual, is fully aware of this and is gambling that fuelling the UK services sector will generate sufficient spending power to overcome the increasing prices of imported goods.

A possible side effect of this budget that Kwarteng may also be banking on is that a weaker sterling increases the attractiveness of rebuilding the UK’s manufacturing capabilities and capacity for both onshoring for domestic consumption and export. By creating favourable export markets investment in UK manufacturing facilities might look increasingly attractive. As we move into a period of global political instability with the rise of China, the reorientation of Russia to the East and the decreasing influence of the USA, domestic supply chain security must be a priority for our political leaders. If only they were brave enough in the 1990’s to realise that nuclear power is the only answer to our long-term energy security. We are now 20 years behind that curve with little option to make up for lost time…

Jim Shaw is CEO and Founder of Shaw & Co

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