The Budget
The Budget is usually one of the highlights of the financial year, preceded by numerous predictions of likely policy announcements and followed by days of analysis. This year, however, the situation has been somewhat different. With the General Election only a matter of a few weeks away, the incumbent government is understandably reluctant to embark on any significant policy changes, but it was also a chance for the Chancellor to unveil his latest forecasts, most notably those relating to public sector debt at present. Mr Darling revealed a reduced forecast for public sector net debt in 2010-11 of £167bn from his previous prediction of £178bn in the Pre-Budget Report but the gilt market reacted by falling slightly – hardly an enthusiastic response. The reason was fairly clear: there were no new measures to tackle the problem, no revenue raising measures or expenditure cuts. It was in effect a “do nothing” budget, with vague references to efficiency savings, but very short on precise details. Of course, most market pundits expected little else and indeed many actually agree that borrowing depends more on the economy than policies.
Although it has been dismissed as a damp squib, it is worth looking at a few of the measures revealed by the Chancellor and their effect on the market. Many eyes were turned to the banks, where support for a tax on the UK banks was confirmed, but only if it were to be agreed internationally. The Conservatives, on the other hand, have confirmed that they would be happy to press ahead with this without international support – this would most certainly not help an industry that is still mired in a bad debt crisis. In addition, the Chancellor announced new lending targets for both the Royal Bank of Scotland and Lloyds - £58bn and £47bn respectively, both huge increases. The inherent danger is that this may increase the threat of more bad debts further down the line. Mr Darling reiterated the previously announced plan to sell off a variety of assets and property in order to raise about £16bn to go towards the public finance crisis. Included in this is the planned sale of Tote by spring 2011. While this is naturally interesting for the market, the actual impact on the deficit is relatively limited.
The changes in taxation were similarly limited in scope and only really amounted to tinkering around the edges. Stamp duty on property stole the headlines, relating to first time buyers, along with a substantial increase in cider duty, but elsewhere the impact was limited, with the inheritance tax nil rate band frozen for the next four years, a 50% top rate of tax confirmed from 6 April for those earning more than £150,000, the personal tax allowance for those earning more than £100,000 to be tapered down, the personal tax allowance for all to be frozen and offshore tax evasion to be clamped down on severely. There were no changes to the somewhat anomalous rate of capital gains tax (18%). The market reacted to Wednesday’s revelations with all the enthusiasm to be expected: it was certainly a political budget, not one for the economy, with very little substance.
This does not constitute a recommendation to buy or sell investments and the value of any shares may fall as well as rise. Investments carry risk and investors may not receive back the amount invested. The views expressed are those of the author and not necessarily of SWIM.
Disclaimer
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
Cunningham Coates Stockbrokers is a trading name of Smith & Williamson Investment Management Limited. Authorised and regulated by the Financial Services Authority.
