It is hard to remember a period in recent times when an incoming prime minister has faced the mountain of challenges that Liz Truss does.
First and foremost, high energy prices are set to cripple households and businesses as autumn and winter approach.
The fact that these are problems she has inherited will not give her a free pass.
So, what does the financial services industry want from a Truss-backed government?
Businesses, as well as households, crucially need clarity on support they may be offered over the coming months.
Larger companies will have been in the position to hedge some of their energy costs, so they will not be as exposed to energy price rises in the short term. However, many small and medium-sized businesses will feel an acute squeeze on costs.
The consumer discretionary sector is expected to be the most at risk from higher energy costs as consumers rein in spending on big-ticket items, such as cars and household goods, as well as clothing and footwear.
The big question is what, if any, measures can be provided to help support businesses. The price increases they have seen reflect the rises in the wholesale cost of gas immediately, without the benefit of a lag through a price cap, as is the case with domestic consumers. Small businesses have experienced a four-fold increase in energy costs over the past 18 months.
'Businesses will be destroyed'
Dan Boardman-Weston, chief executive and chief investment officer at BRI Wealth Management, says: “Without support from the government, countless perfectly viable businesses will be destroyed while energy prices remain high.”
The unenviable task of coming up with the solution to address the crisis rests mostly with the recently appointed chancellor, Kwasi Kwarteng, who sooner rather than later will need to show that he is getting a grip on the cost of living crisis.
The Bank of England is predicting that the UK will experience a recession – defined as two consecutive quarters of economic decline – lasting 15 months, due to the impact of higher interest rates and soaring energy costs.
A study by the BoE indicates UK companies are confident they can pass on rapid cost increases to consumers to protect margins. Although this offers some comfort to investors, it will be worrying for policymakers and the central bank as it indicates that higher inflation could become embedded – at a time when many households already face very high bills they will struggle to pay.
Truss has stood firm on her decision not to provide handouts, but instead to lower taxes.
During her campaign to become prime minister, she promised to cancel the national insurance rise, scrap a planned increase in corporation tax and even potentially look to increase the marriage tax allowance.
But the challenge with lowering taxes is to do it without triggering further rises in inflation.
Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, says if Truss continues down the tax-cut road, she could do something with business rates too. However, if this does not offset the additional energy costs sufficiently, the government could consider a price cap, particularly for smaller and more vulnerable businesses.
Another option is to freeze energy bills, but how will that be funded? One option not on the table is a windfall tax on energy companies.
Coles warns of the risk of tax cuts doing more than offsetting rising prices for higher earners. She says: “While it would be a welcome boost for them, it could mean pushing prices up even further, which could leave us all worse off.”
So fulfilling Truss's promises will be an expensive endeavour for chancellor Kwarteng.
Shaun Moore, tax and financial planning expert at Quilter, says that while Kwarteng’s predecessor – Rishi Sunak – was keen to slow inflation, balance the books and limit borrowing by increasing taxes, Kwarteng has already faced some criticism for taking the borrowing approach.
Rachael Griffin, tax and financial planning expert at Quilter, explains that the marriage tax proposal would allow couples to pool their personal tax allowance – this is the amount a person can earn before starting to pay income tax, currently £12,570.
A fully transferable allowance would mean one spouse could earn up to £25,140 tax-free if the other is not earning due to caring responsibilities.
Griffin says that although it is not an intrinsically bad idea, it fails to help the many families who have two working parents. Additionally, with a potential recession looming, it feels like an “odd” policy that might not encourage people into the workforce and therefore boost economic growth.
According to Jon Greer, head of retirement at Quilter, an area ripe for reform given the cost pressures people are facing is the money purchase annual allowance.
At present, the threshold of £4,000 is simply too low as people who have rightly decided to continue to pay into their pension following accessing their funds get penalised.
Anti-recycling
Greer says the threshold should be moved to around £10,000 or scrapped altogether and replaced with anti-recycling rules.
He adds: “Changing these rules could act as a lifeline for those struggling to pay their bills this winter who access their pension and are not then penalised for doing so when they resume contributions in the future.”
Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, agrees that anti-recycling rules should be introduced to help those relying too heavily on their pensions.
She adds: “People who have had to raid their pension to make ends meet or are returning to work to boost their pension to cope with soaring bills face a pension headache. Under current rules if you have already accessed your defined contribution pension, you can’t contribute more than £4,000 a year.
“The money purchase annual allowance of £4,000 was introduced to stop ‘recycling’, where people access their pension and then re-invest contributions for another round of tax relief, but the same thing could be achieved with anti-recycling rules, which only kick in when someone has accessed their pension with the express intent to recycle the cash.”
There are also calls from the industry to permanently cut the penalty for the Lifetime Isa.
At the moment, if you take cash out of the Lisa before the age of 60 – for any reason other than to buy your first property or retirement – you face a penalty of 25 per cent.
Morrissey says cutting the penalty will prevent people losing savings at a time when they really need it.
She says: “While [the 25 per cent penalty] may look like you are just giving up the government bonus, it also takes a chunk of the money you have saved.
“It means anyone turning to this money while life is tough will pay a horrible price for having tried to do the right thing.
“We want to see the Lisa penalty reduced to 20 per cent, to help people use their money in the way that makes most sense for them, without losing some of their own savings at a time when they can least afford it.”
Ima Jackson-Obot is deputy features editor of FTAdviser
