Liz Truss has emerged as the new leader of the Conservative Party and will step in as prime minister tomorrow. Her announcement marks the ends of a leadership campaign that started on 7 July with Boris Johnson’s resignation.
During the campaign, candidates Truss and Rishi Sunak often offered contrasting interpretations of how to approach their tenures, but many of their ideas were met with scepticism.
Below, financial experts shared their views on what to expect from the next two years under Truss’ government, with particular attention to pensions and personal taxes.
The economy
Elliot Hentov, head of macro policy research at State Street Global Advisors, believes the new prime minister will share the fate that many Britons will be confronted with in the upcoming 2022-2023 stagflation recession – unemployment.
“The labour market is likely to soften a lot over the coming year with a significant rise in unemployment expected – and a similar fate looks likely to befall the new prime minister,” he said.
According to Hantov, the stagflation recession of 2022-2023 will hit household finances hard and, at the same time, growth will be dampened by the Bank of England’s interest rate hikes to tame inflation. All fiscal initiatives by the incoming prime minister to help buffer the energy price shock are unlikely to offer any respite.
“It's hard to overstate how painful this is for the electorate. The combination of economic recession, higher unemployment and lower real wages does not bode well for the political survival of any government,” Hantov warned.
“In this regard, we believe Truss would not even enjoy the typical political honeymoon period upon taking office and is likely to end up holding the shortest tenure in office of any Prime Minister over the past half-century before elections in 2024 prompt a change in government.”
However long her tenure might be, Truss won’t escape some huge challenges, which, according to head of fixed interest research at Quilter Cheviot Richard Carter, she has yet to prove she is up for.
“It is not clear that she has the answers to any of the country’s problems – the cost-of-living crisis, a rapidly slowing economy and rising interest rates. Instead, she seems to be considering altering the institutional framework of the UK economy in areas such as the Bank of England’s inflation mandate and the role played by the Office for Budget Responsibility in budget forecasts, which will not instil confidence amongst international investors,” Carter said.
Tax
Rachael Griffin, tax and financial planning expert at Quilter, is also perplexed by Truss’ “odd and expensive” proposals to cancel the national insurance rise, scrap a planned increase in corporation tax and potentially look to increase the married tax allowance.
While her promise to call off the National Insurance hike on day one of her office grabbed a lot of headlines, “she has, so far, not put forward any proposals for how the planned social care reforms will be paid for without the increase,” said Griffin.
“Scrapping the hike may well lead to a situation where Truss robs Peter to pay Paul if she wants to keep the planned social care reforms.”
The marriage tax proposal, which would allow couples to share their tax allowance (with one spouse potentially earning up to £25,140 tax-free), is “not intrinsically a bad idea”, but fails to help the many families who have two working parents and “feels like an odd policy, which might not encourage people into the workforce and therefore boost economic growth”, according to Griffin.
Pensions
Jon Greer, head of retirement policy at Quilter, also thinks Truss will struggle to balance the books – not only in light of soaring inflation and her desire to slash taxes, but also because she promised to stay true to the Tory manifesto of keeping the triple lock on pensions.
Come September, the rate of the consumer price index used as part of determining the state pension increase next year is likely to be over 10% and pensioners can expect to enjoy a material boost to their regular payments.
That is, unless something has to give, in which case, Greer anticipated, pensioners up and down the country will be hoping that it doesn’t start with the triple lock.
NHS pensions expert at Quilter Graham Crossley flagged concerns around the draft proposals around NHS pensions that would allow doctors to continue working after reaching their lifetime allowance without paying excess taxes, a phenomenon that is leading to many senior staff retiring early.
Markets
Gilt markets and sterling suffered a torrid August against the backdrop of a rudderless government while the leadership contest played out and Chris Beauchamp, chief market analyst at IG Group, said this combination will be “the mother of all policy headaches” for Truss.
“The best that can be hoped for is that perhaps markets will give the UK government a hospital pass when it comes to massively increased borrowing/big increases in deficit spending if the end result is to cushion the blow of the huge rises in prices and energy costs,” he added.
For Quilter’s Carter, markets will want to see Truss pivot away from Tory member-friendly soundbites towards sensible long-term economic policies designed to support the economy during a difficult time while also working to bring down inflation.