Big Dreams, Mini Budgets

The following is a summary and explanantion of the Bank of England's recent announcment.

A central bank has the responsibility of maintain financial stability within a country. The Bank of England (BoE) is England’s central bank. The UK has faced great financial instability (a fall in the value of the pound, and increase in interest rates) following the reformation of the UK government and subsequent changes to tax policies. Therefore, the BoE has taken action to restore financial stability.

From the 28th of September 2022, the BoE has purchased long-dated gilts.

Gilts are UK government bonds. A government bond is government debt. UK government bonds are known as gilts.

A central bank will purchase government bonds, which will increase the money supply in the UK as they exchange money for the bonds. . Large financial institutions (FIs) (like banks) hold gilts, which the BoE will exchange for money. With more money supplied into the economy, businesses and people have more money to spend. This is intended to keep the exchange of goods and services going.

A significant way that his money reaches households and businesses is through loans. With more money, these FIs can give out more loans. A loan is a liability: a financial responsibility to pay money. With a loan, a business person can expand their business, which has a impact on the wealth of the workers and customers: a liability driven investment has been made.

The BoE is now announcing:

To steadily increase the continued purchase of gilts. This should steadily increase the money supply and liability driven investment (as explained above).

Expand available collateral. Collateral is money (in this case, but can be another asset) which is held to replace money lost due to a loan not being repaid. By expanding available collateral, the BoE enables FIs to give out more loans because FIs will now have increased collateral which they can claim if they don’t get their money back. With more loans lent out, more money is in the hands of businesses and people, so goods and services can continue to be exchanged.

Swap shower gels and other liquid body washes for bars of soap.

A bar of soap is often relativley cheaper than a shower gel and can last longer. For myself, I was able to purchase a pack of 2x125g "Simple, soap for sensitive skin" bars for £1.10 from a discount health and beauty store. 1 bar can last me 2 months, so relying only on these bars of soap, the cost of body and face wash over the course of 4 months for me has only been £1.10.

Shower gels are usually more expensive and a bottle only lasts for a couple or a few weeks. Moreover, they are inefficient when one uses a shower gel and more spills out than intended... that is literally money being poured down the drain. On the other hand, you cannot incidentally over use a bar of soap.

One main concern when choosing to wash with a bar of soap is that it is more drying than a shower gel, however there does exist a variety of soap bars which cater to a variety of preferences- like the Simple soap for sensitive skin, that I mentioned, or Dove's Sensitive Skin Beauty Bar amongst many more.

Using a bar soap can save you money on body and face wash because they last longer than shower gels of the same price. I recommend that you opt for a bar of soap next time you're out shopping at the supermarket, or at a health and beauty store. I would say a good deal is one which prices each ~100g bar of soap at 80p or less (e.g. a pack of 2x100g bars for £1.45)

You could also get your bar of soap now online:

This week, at the Conservative Party Conference, Kwasi Kwarteng, Chancellor of the Exchequer, announced that they will no longer scrap the 45p rate, that was to be a tax reduction for people earning more than £150,000 a year. On the 23rd of September 2022, the Conservative party announced the Mini Budget.

A normal budget released by the UK government constitutes the spending plans and means to raise revenue at the start of the financial year. A budget must be scrutinised by parliament before it is approved and written into law. On the other hand, the acting government has the ability to produce a budget before the start of the financial year, without parliamentary scrutiny. This is typically undertaken for emergency measures. The Mini Budget was a sort of emergency budget, produced in the middle of the financial year, after a new Prime Minister was instated outside of the election cycle, alongside a new cabinet- an unusual circumstance which could require an emergency budget.

Nevertheless the Mini Budget of 2022 holds economic significance because it is the biggest package of UK tax cuts seen in half a century: it amounted to around £45bn of tax reductions for people and businesses (which also means a £45bn reduction in revenue received by the government, so a £45bn reduction in funding for public services, e.g. schools and highway maintenance). A notable, controversial aspect of the Mini Budget was that it had more generous benefits for the wealthiest individuals in UK society. Particularly, the 45p rate was going to be abolished.

Anyone earning more than £150,000 a year pays 45p for every additional £1 they earn above that threshold. Without that rate, the highest tax bracket would have been 40p paid on every £1 earned over £50,270.  This cut in tax for the highest earners would have enabled them to take home an additional £10,000 per year, on average. Generally, the response to the Mini Budget announcement had been negative: the value of the pound fell below £1.05 against the US dollar, and the cost of borrowing for the UK government increased (a fall in confidence that a government will pay back its debt is reflected in a higher cost for it to borrow).

With general negative feedback to scrapping the 45p rate, on Monday, the 3rd of October 2022, the Conservative government announced that it will no longer go ahead with the tax cut.

Almost two weeks since the Mini Budget was announced, and less than a week since the U-turn on the new tax cut, the value of the pound is re-approaching pre-Mini-Budget levels (>£1.10/1$). Tax reductions from the Mini Budget (as they stand, although they may change), are due to reduce government revenue by £43bn now, saving £2bn in revenue for the public budget specifically due to no longer abolishing the 45p tax rate.