By GRAHAM FROST 25/11/2009
The UK’s national debt is so massive now that room for manoeuvre on election friendly give- aways (this Government has to call an election by May) is virtually non-existent. VAT is scheduled to go back to 17.5% in January from the temporary 15% introduced for stimulus purposes. A new 50% income tax rate for those earning above £150,000 is set for April.
We have asked two leading economists to give us their views on what to look out for in Darling’s Pre-Budget report scheduled for 9th December:
Henderson’s Simon Ward
"The Pre-Budget Report is likely to be a holding operation designed to highlight policy differences with the Conservatives. The Chancellor will aim to convince markets that the deficit will be reigned in, while delaying the bulk of necessary further tightening until after the election.
The Treasury is unlikely to make a major revision to its Budget forecast of net borrowing of about £175 billion in both 2009-10 and 2010-11, with a steady decline thereafter. While GDP has contracted by more than expected this year, the budgetary impact has been offset by a smaller rise in unemployment and recoveries in markets and the oil price. Officials will probably raise their growth projection of 1.25% in 2010 contained in the Budget – the Bank of England's central forecast is for a 2.2% GDP gain.
The Chancellor, however, is likely to wish to demonstrate his deficit-cutting credentials by announcing further phased tax increases, with an emphasis on measures the Conservatives will find difficult to oppose. Possibilities include lowering the threshold for the new 50% tax rate from £150,000 and aligning capital gains and income tax rates, which would have the additional attraction of reducing avoidance. Mr. Darling could make a larger dent in the deficit by announcing a further VAT increase from 2011.
Public spending forecasts are likely to be unchanged from the Budget, with the Chancellor arguing that these plans already embody significant restraint and challenging his opponents to identify greater savings.
The key risk for investors is that markets lose patience with the Augustinian strategy, resulting in higher gilt yields and renewed downward pressure on sterling."
Schroder’s Azad Zangana
"As the UK continues to suffer its deepest and longest recession since the Second World War, the Chancellor is running out of time to restore confidence in the Labour Party’s handling of the economy. In addition, the political debate has moved away from which party will protect public spending to which party will best manage the age of austerity that will undoubtedly follow the next general election.
Notwithstanding some poor performance figures in October, we think the Chancellor will manage to find some wriggle room to be able to announce some token short-term fiscal measures, and a reduction in the borrowing numbers across the forecast horizon. This is mainly thanks to a better performance from the labour market, where unemployment has been lower than expected, and average earnings slightly higher. In addition, assumptions on house prices were also too pessimistic, all of which taken together help raise revenue forecasts moving forward.
We do not expect the Chancellor to ease up on relatively high-earners. With pressure to force more bankers to take bonuses through deferred share-options, we expect the chancellor to target any tax-saving incentives associated with the practice.
Spending on front-line services will be closely scrutinised, but we expect some money to be found from efficiency savings, helping to protect current spending plans (at least until after the election).
Overall, the Pre-Budget Report should provide a small boost for gilts, though we expect this to be short lived as net issuance to the market gathers pace."
Our view
This Government has to tax those that can most afford it. For high earners who do not wish to emigrate, taxes are going up and you should do all you can ahead of time to mitigate the effects. Rules may change on tax free money so:
- Realise any tax free gains as soon as you can or be prepared to postpone them for a long time. The gap between 18% Capital Gains Tax and Income Tax at 50% is likely to close, so it may be worth cashing some investments early.
- Use your Capital Gains Tax allowance currently at £10,100 for 2009/10.
- Maximise your tax efficient investments, exemptions and allowances immediately. It is unlikely there will be any further changes to the ISA allowance or pensions contributions, but it is likely taxes will rise in the future.
- Purchase bigger ticket items ahead of the probable VAT rise. To benefit from the lower VAT charge at present.
- Make sure your portfolio is diversified enough offshore. To get exposure to economies where growth is expected to be stronger.
If there is anything you wish to discuss regarding this article please call one of our Advisers on 020 7189 9999.