Scottish firms will be less likely to invest and hire workers after Liz Truss’s proposed tax cuts provoked a collapse of £447 billion in stock and bond markets, an investment expert warned.
The UK’s stock and bond markets lost hundreds of billions of pounds in the nine days since chancellor Kwasi Kwarteng’s “mini-budget” and investor confidence has been badly shaken.
More than £269bn has been wiped from the value of the UK’s top 350 firms since September 5 when Truss was confirmed leader of the Conservative Party.
In that time, a UK Government bond index – which monitors a type of bonds or gilts issued by the UK Government in order to finance public spending – lost more than £160bn in market value, according to data compiled by Bloomberg.
Russ Mould, investment director at leading broker AJ Bell, one of the UK’s biggest investment platforms, said: “A falling share price – or volatile markets – will inconvenience those companies that are hoping to raise money by selling shares, either as a market newcomer or as an already-quoted firm.
“They could also scupper a planned deal if the buyer was hoping to use its shares as a currency rather than cash.
“However gyrations in the bond and gilt markets are potentially quite serious. Any loan that anyone makes will be seen as riskier than that and the lender – or bond buyer – will demand a higher coupon, or interest rate, as compensation for the greater dangers, perceived or otherwise.
“A rising 10-year gilt yield will therefore make it more expensive for firms to borrow or when they have to repay and rollover existing debts and take out new loans.
“The higher interest costs can hit profits and cash flow, limit scope to invest and hire, as well as limiting the amount of spare cash left at the end for dividends for shareholders.
“If yields reach a sufficiently high level then the company may just choose to keep its cash in the bank and not take the risk of investing in new plant or assets or research at all.”
The UK Government has resisted calls to publish an independent report on the cost of their tax-cutting plans before the scheduled announcement on November 23.
The news comes after Truss joined Kwarteng at a meeting with the government’s financial watchdog, the Office of Budget Responsibility. It had offered to cost the plans, which observers say would have reassured the markets, but were turned down. After the meeting, it confirmed it will deliver its first draft of a forecast next Friday but the forecast won’t be made public until November when Kwarteng will reveal his medium-term fiscal plan.
Mould added: “Moving share prices, and rising or falling market capitalisations, should make little difference to the day-to-day operations of most firms.
“They are numbers on a screen and the board must not be swayed, else they fall into the trap of managing the share price and not managing the capital at their disposals – human, physical and financial.
“It will be tempting to cut corners and try to influence the near-term share price but the negative long-term effects can often more than offset the immediate benefits.”
Professor Mairi Spowage, director of the Fraser of Allander Institute, said the financial shockwaves of the plummeting share and bond prices could last some time.
She said: “Shares prices can go up and down but the fact they have been losing value raises the prospect of recession.
“It’s difficult to say what the full impact will be in Scotland. The Scottish economy accounts for 7% of the whole UK economy but this relates to values of companies so it’s not so clear cut to calculate what the cost will be to Scottish firms.
“Next week the stocks may rally. The fact the UK Government has gone ahead without OBR scrutiny is unprecedented and has created nervousness about their plan.
“Maybe they did not think they were going to like what the OBR were going to say about it.”
Colin Borland, director of devolved nations at the Federation of Small Businesses, said: “The world of international financial markets might seem remote from the day-to-day pressures facing most small businesses.
“But, if interest rates continue to rise, as it looks certain they will, that will have real-world consequences.
“First, business finance will become more expensive to service – and, of course, every extra pound that goes into loan repayments is a pound not going into staff wages or being invested in the business.
“Similarly, if hard-pressed households see their mortgages and other loans becoming less affordable, they’ll have less to spend in their local economy, hitting footfall and turnover.”
Economists also warned levels of productivity in Scotland were already behind the rest of the UK and the fiscal event could make that problem worse.
Dave Hawkey, senior research fellow at IPPR Scotland, said: “The overwhelming evidence is that the UK government’s budget was bad for the economy, bad for people, and bad for Scotland – all while the very richest disproportionately benefit from tax cuts.
“The economic impact of Truss and Kwarteng’s decisions makes a recession in Scotland more likely, or deeper, and that will put further businesses and jobs at risk. The UK Government must U-turn.”
Shelagh Young, of Scottish think tank The David Hume Institute, said: “The immediate effect will be people eating out less, going to the cinema less, buying fewer clothes but in terms of a precise and specific thing that’s going to be particularly bad for Scotland, productivity is what business should be looking at.
“One of the things we can say, because it’s well-researched, is one of the factors that undermines productivity is when employees are unhappy. If people are stressed and their health is poor, they are going to be less productive. We have seen from our research prior to the fiscal event, more than half of Scots are in that position.
“They are so worried about their finances it’s affecting their mental and physical health so you can definitely make the argument that Scotland is going to be hit by a wave of people underperforming at work as a result of the fiscal event.”
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