Autumn Budget 2021 Inflation Smokescreen

Published / Last Updated on 28/10/2021

In his Autumn Budget Speech, the Chancellor suggested he had again written to the Governor of the Bank of England reaffirming the Government’s target of 2%pa trend inflation.  We suggest this is ‘flannel’.

We all know that governments around the world need to pay for covid-19 debt and they cannot afford to do so.  Increasing taxes is a political risk.  Inflation is an economic risk but over time will devalue government debts in Gilts and Bonds before they are due to be repaid.  At 5%pa inflation over 10 years, compounded inflation would devalue fixed rate debt by 62% and even more at year 20.  Inflation is the only way that covid-19 debt will be repaid.

This is why we believe the Chancellor’s actions speak louder than words.

In this Budget, the National Living Wage was confirmed to increase from April 2022 as follows:

  • Age 16-17 up 4.10% to £4.81 per hour.
  • Age 18-20 up 4.10% to £6.83 per hour.
  • Age 21-22 up 9.80% to £9.18 per hour.
  • Age 23+ up 6.6% to £9.80 per hour.

Increasing National Living Wage by nearly 5 X the target inflation rate for 21/22 year olds and 3.5 X target inflation for 23+ year olds is a stealth move to increase all wages across the UK.  Wage inflation = property inflation = business costs up = prices go up even further.  Across the board, this will mean more tax revenue, stamp duty revenue, VAT revenue and of course devaluing government debt.

The Spring Budget 2021 (March) also confirmed corporation tax rises (currently 19%). 

From 1 April 2023:

  • Small company profits up to £50,000 have a tax rate of 19%.
  • Intermediate companies (most UK companies) with profits between £50,000 and 250,000 will have a tax rate of 26.5%.
  • Large company profits over £25,000 have a tax rate increase to 25%

The above minimum wage increases, corporation tax rises on top of the Health and Social the new care levy on 1.25% employers, employees national insurance and dividend tax increases of the same meaning business costs are going to rise meaning prices go up, meaning inflation.

Prepare for this and invest in inflation protected assets and investments.  Like we said as the start, any government spin on keeping inflation low is just that, it is a smokescreen.

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