By ADRIAN LOWCOCK 06/07/2009
The debt burden – What can be done
As mentioned in my article on Friday 3rd July, Government debt will rise to £175 billion by the end of the year. Quantitative Easing (QE) has in the past resulted in high Inflation. However, we believe rising and high inflation are unlikely to be a problem as any economic recovery will be weak. So what are the options available?
The future state
Even in the unlikely event of a rapid economic recovery, this would only offset some of the debt, but not all. There will have to be cuts in public expenditure and tax increases to plug the gap. Public expenditure always faces upward pressure and this will only increase as the cost of servicing public debt goes up because the sums and interest paid on it rises.
There will be pressure to raise taxes. With a funding gap of £70 billion we could see the basic rate of income tax increase to 25%, VAT go to 20% and further increases on alcohol, petrol and cigarettes. Tax rises will not help stimulate demand as they will directly reduce the amount of money we all have to spend, making us less well off and forcing cut backs in spending habits which will stifle any recovery. Too much tax and we could end up in another recession in a few years time.
In the end there is little choice, the budget deficit is rising at a staggering rate and needs to be paid off. Economic growth is unlikely to be strong for several years and tax rises will be needed to pay the bills.
How to minimise the impact
Ultimately we will all be paying more in taxes for many years to come. Emigration is one way to avoid the impact but is not a practical solution for the majority of us.
ISAs
The change in budget rules now mean ISAs should always be considered the first port of call for your savings and investments.
Cash ISAs - If you are putting money away for a rainy day, then cash ISAs should be considered to avoid paying income tax. Whilst rates are low at the moment, don’t expect them to stay that way indefinitely.
Stocks and shares ISAs – These should be considered for longer term investments. If you can use up your allowance each year (£10,200 from 6th April 2010, or 6th October 2009 if you aged 50 or over by 5th April 2010) then do so. Otherwise, consider carrying out a bed and ISA transaction; where you sell an investment held outside of an ISA wrapper and repurchase it inside one.
Pensions
The budget has made pensions even more complicated than before. However, for most people pensions are still a tax efficient option. With up to 40% tax relief on your investment (depending on your income level) the power of up front tax relief can be substantial on maximising returns on your investments.
Venture Capital Trusts (VCTs)
These are not for every investor, as VCTs are higher risk because they invest in small companies. However, as an incentive, the government currently allows for tax relief of 30% on up to £200,000 invested as long as the investment is held for 5 years.
If there is anything in this article you would like to discuss please call one of our advisers on 020 7189 9999.