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At a time when millions are grappling with rising prices and a cost-of-living crisis, the International Monetary Fund warned that the U.K. government’s spending plans “will likely increase inequality.”
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The U.K. economy has been gripped by market mayhem for the last week.
The British pound plummeted, the value of government bonds crashed and the Bank of England intervened with an emergency plan to stabilize financial markets.
This chaos can be traced back to Finance Minister Kwasi Kwarteng announcing a “mini-budget” on Sept. 23. His plan includes widespread tax cuts, fewer rules and regulations for businesses and the removal of a cap on bonuses for bankers.
At a time when millions are grappling with rising prices and a cost-of-living crisis, the International Monetary Fund said Tuesday that the new policies “will likely increase inequality.”
Criticism and uncertainty have been widespread, especially among young people. Google searches like “do the tax cuts help me” skyrocketed, while outrage was rife on social media.
So, what does it all mean for young Brits? How does the budget and resulting economic chaos impact income, first-time homeowners and student loans?
CNBC Make It spoke to three personal finance analysts to find out.
Do the tax cuts equal more cash in hand?
The majority of the budget focuses on tax cuts. The basic income tax rate will drop by 1 pence ($0.01), which will “help a little,” says Chieu Cao, CEO of financial wellbeing platform Mintago.
“Someone earning £25,000 a year will save £124.30 annually, while those on £35,000 will save £224.30,” he added.
Similarly, the reversal of the recent National Insurance (tax on earnings) bump by 1.25% will have a small impact and boost employees’ paychecks.
“Someone earning £30,000 a year will save £218 when the NI rate comes back down,” Cao says. “But, in a high-inflation environment, these savings will do little to account for the rising cost of living.”
Those further up the income spectrum benefit most.
Myron Jobson
Senior personal finance analyst at Interactive Investor
In addition to the usual taxes, many recent graduates are worried about what the budget will mean for them. Student loan repayments are not directly impacted by the so-called mini-budget, and the government has capped interest rates on them for now.
How does it affect the housing market?
At first glance, the budget only addresses a small part of the housing market: a reduction of stamp duty, a tax paid by many buyers when purchasing a property. However, first-time buyers only have to pay the tax if their new home is worth more than the average U.K. property.
The majority of first-time buyers fall below this threshold and therefore won’t benefit from the cuts, Jobson said.
“The change mainly benefits high-earning first-time buyers and those with sufficient backing from the bank of mum and dad,” he added.
Indeed, Jobson said the mini-budget may have made buying a house even more difficult.
It is thought the new U.K. government’s mini-budget may have made buying a house even more difficult.
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“The fall in the value of the pound following the mini-budget resulted in violent movements in the money market that has seen lenders pull competitive home loans in anticipation of further interest rate rises. This has pushed many wannabe homeowners to the sidelines,” he explained.
Sarah Coles, a senior personal finance analyst at Hargreaves Lansdown, adds that this is also likely to impact those who aren’t yet looking to buy and plan to keep renting their homes.
“Landlords with mortgages are likely to see their monthly mortgage payments rise significantly … There’s every chance they will pass the extra costs through into higher rents in order to make property rental add up for them.”
What if I want to start investing for the future?
The mini-budget itself hardly impacts saving and investing — two themes that young people are constantly advised to prioritize. The economic impact of the new policies in terms of creating uncertainty around interest rate hikes, inflation and recession, however, could make a difference.
“Interest rates are rising, which would typically help young people with investments and savings – it ought to ensure they achieve better returns. However, interest rates are still dwarfed by inflation for the most part, which means money left in savings accounts is likely to be losing money in real terms; the price of everything else is increasing faster than the size of their savings pots,” Cao said.
For investors, the recent market turbulence might not be all bad news, Coles said. “There has been an initial reaction to the turmoil but over time the impact will depend on what you hold and where those companies make their money,” she said.
“This doesn’t necessarily mean you should do anything different with your investments. If you have a sensible diverse portfolio then it’s important not to panic because investing is a long-term business,” Coles said.