As the dust settles on yesterday’s Budget statement, RBC Brewin Dolphin’s Chief Strategist, Guy Foster, says the Chancellor’s blend of short-term borrowing and future tax rises has reassured markets, even as frozen thresholds and a new mansion tax push more households into higher tax brackets. Foster shares his reflections with us in the following update:
“There are always political and economic stakeholders to be managed when releasing a Budget. The latter, including the Office for Budget Responsibility (OBR) and the financial markets, seem to have been appeased, however it typically takes longer to assess the former.
“It was well known that the Chancellor would need to cut spending or raise taxes because changes to the OBR’s growth forecasts meant that she was no longer on track to meet her fiscal rules. In response, she has undertaken to increase borrowing in the near-term, while raising the tax burden later.
“The bulk of the delayed pain will come from keeping tax thresholds frozen, allowing more taxpayers to drift into higher tax brackets as their wages rise. Its proponents will argue that the burden of this Budget lands on those with the broadest shoulders, but freezing thresholds increases the number of broad-shouldered individuals (if defined as those paying higher rate tax) from around 8% of the adult population in 2020 to 16% now.
“Investors had been braced for worse and seem to be breathing a sigh of relief in the hours after the release of the Budget. Bond yields, which ultimately determine the cost of new borrowing for the government, have fallen slightly. The pound is up and there isn’t any meaningful change in the outlook for interest rates.
“One of the most eye-catching elements of the Budget is the high value council tax surcharge (HVCTS) or ‘mansion tax’. Just under 1% of homes nationally are estimated to be worth £2 million. At the margin, this will further diminish demand for higher value homes, but this was already weak in anticipation of such a policy.
“The transactional costs associated with such properties – such as stamp duty, which would be £153,750 on a £2 million property – dwarf the surcharge. While those are one-offs and the surcharge is an ongoing cost, at an effective rate of no more than 0.15% even modest house prices gains would comfortably offset the charge.
“Overall, however the good news is that the Chancellor has raised the margin by which she is meeting her fiscal rules, reducing the risk that further measures might be required in future budgets.”
