Michael Browne, Chief Investment Officer at Martin Currie, provides a preview to Jeremy Hunt’s Spring Budget, analysing how expected measures will impact investors.
Every year Politics and the real world collide over the budget. What are the decisions you can make with the country’s finances to advance your political agenda? But not scare the “bond vigilantes”. Jeremy Hunt wants to be seen as part of a tax cutting party with a fiscal rule, yet trying to raise spending on the NHS whilst debt to GDP and taxation rates are the highest seen in peacetime. Add in the need to get re-elected in the next 9 months and politics and reality collide.
Investors should be comforted by this lack of room to manoeuvre, especially looking ahead to the next government, which will come with a 5-year mandate. There is probably enough spare to manage a drop in the basic tax rate of 1p but no more. Would it be better spent through another National Insurance cut, probably, but that didn’t work at the last budget. What more can a poor chancellor do?
What to tax? Travel, Fuel, “Sin”?
There are several areas that could see a rise in taxation, to fund further rate cuts. Suggestions include business class travel on airlines, hitting British Airways but not Easyjet. Extending the corporate windfall taxes on Oil and Gas and perhaps other areas as well? Traditionally the banks, whose profits have been boosted by the rise in rates, have been raided in this way. Vaping and Alcohol the so called “Sin” taxes” are often targets, as is fuel. However, tax rises on fuel bills, which would be immediately inflationary would be counter-productive.
Where else could money be found to cut the employees tax bill? Non-Doms are another perennial topic, although the numbers differ significantly on its effectiveness. A new area of interest is of holiday lets: second homes let on short term bases, such as via AirBNB currently attract a range of benefits for the owner, not available for those renting long term.
Housebuilding and the ‘BRISA’ could benefit savers and the economy
As can be seen above it is not easy to help the individual at the expense of the corporate: One area where the corporate may benefit would be in Housebuilding, with a new Help to buy scheme. In the past help to buy schemes have taken a number of forms. From deferred deposits to guarantees from the government for a new loan % over 70%. The idea is that the banks will then lend higher % multiples without the need to offset this with high capital “provisions” for modelled losses.
Savers may benefit and we are hoping for a British ISA, to encourage long term savers to invest in the UK economy once more.
The ISA limit of £20,000 has been held since 2017. As such it needs to rise to take account of inflation. A British ISA of £10,000 would raise cash flows to Equities and Gilts, simultaneously funding UK PLC and lowering Interest rates. Given the Government faces a £44 billion interest bill next year, getting rates down, is almost the key to fiscal success.
Expect boring budgets and falling rates
Finding money for individuals, at the expense of Corporates is not a recipe the markets would get excited by and that is important. There should be little to worry bond, currency or even equity markets (except windfall taxes). If you are managing a high debt economy to reasonable fiscal rules, not many choices remain. We should prepare ourselves for a long series of budgets that say much but deliver little. The biggest gain from this and any future “boring budget” could be through falling interest rates.
Fiscal policy can have a real impact. If VAT were to be cut (and retailers pass the cut on) its impact would be immediate. Raising taxes on fuel by 5% as should be done would add more than 1% to inflation. The political need is to make sure rates are falling, and falling fast. So making sure the Gilt market is not unsettled by the spending (2p off income tax) or MPC is delayed in cutting rates is as important as any tax cutting measures. Cut too much, provoke inflation and you prevent rate cuts.
Such is the tightrope the chancellor is dancing on.
