The UK is grappling with the cost-of-living crisis with rising inflation, plummeting currency, and a steep rise in energy prices, thanks to the Russian invasion of Ukraine. Add to these the recent political turbulences, after-effects of the mini-budget, and fallout from Brexit and you have a potent economic storm brewing up and forcing the mathematical certainty that the country is heading for, or already in recession.

Effect of September 2022 Mini Budget

Tax reduction measures valued at 45 billion included tax cuts and scraping of 45 percent top rate of tax. The proposed tax reductions had no funding support, implying the possibility of public borrowings.

The immediate market reaction caused gilt yields to soar and a record drop in sterling value against the US dollar. The Bank of England intervened by pledging to buy up to 65 billion of bonds to provide respite for the gilts market. The backlash of criticism made the Truss government fall, making her the shortest-serving PM in the annals of the UK's history.

Ambiguity about the economy impacts investors

Despite the change of guard after Truss's exit, many investors expected the new government to retain the last government's ambitious economic plans. However, the new finance minister announced the rolling back of most tax cuts in the Truss growth plan.

The new finance minister emphasized the government's commitment to controlling the UK's debt. He, that is Jeremy Hunt, highlighted plans to cap energy prices for a limited period until April 2023.

Several factors influence economic uncertainty, making it challenging for investors and economists to plan investments or forecast the financial path.

Even though assurances by the incumbent government about the financial path may help control the financial market temporarily, investors expect better clarity about the budget plan. Holding the budget and not explaining how it will be finded affects international investor engagement negatively.

It is unsafe to predict interest rate hikes because of the chaotic political and economic environment. The future moves of the Bank of England are uncertain. The bank may force some harsh decisions in November or December. Uncertainty about energy prices in the coming months makes it nearly impossible to predict household budgets.

Tough decisions on the anvil

The newly elected Prime Minister termed the present situation a profound economic crisis. The delay in presenting the budget will allow some time for the incumbent government to make some difficult choices to put the economy on track. This is besides fixing the previous government's mistakes.

The government must plan to hike taxes and curtail public spending to bridge the huge demand for funds ranging between 30 billion and 40 billion within five years. These are unpalatable measures for people already reeling under soaring energy and food expenses besides the cost-of-living crisis.

The Rishi Sunak government may try to squeeze more taxes from the corporate sector. It is widely expected that the corporate tax rate will probably rise to 25 percent by spring. All this while thousands of small and medium sized businesses are still to pay back covid bounceback and CIBILS loans and have to meet rising interest and energy costs.

Measures to levy excessive taxes or reduce spending may worsen the government's spending problems and the debt situation. The finance minister assured the new government would provide an in-depth assessment of spending and growth plans in consultation with the Office for Budget Responsibility.

Investors look forward to knowing what tough decisions the government plans to make to manage the rising debt burden despite the ongoing recession and cost-of-living crisis. There will be no immediate and easy solutions to the complex economic problems of the country.

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