will be stretched over a longer period, but
that the same will apply to other government
spending.The rollercoaster profile for public
spending set out in March – harsh cuts in
the first two years followed by big spending
increases in the run-up to 2020 – has been
replaced with something more sensible, and
more achievable.
That showed Osborne to be more of a
pragmatist than he is sometimes given credit
for. There was the expected £5 billion to
be raised from a clampdown on tax evasion
and avoidance, including restrictions on
non-domicile status. But there were also
explicit tax increases: a new tax on dividends
(along with a £5,000 tax-free allowance) will
eventually raise more than £2 billion a year;
Vehicle Excise Duty reformwill eventually
bring in an extra £1 billion a year from
motorists; Insurance PremiumTax rising
from 6% to 9.5%will raise £1.5 billion a
year; and landlords face a tax increase through
the restriction in mortgage interest relief
to the basic rate and reduced wear and tear
allowances. Osborne delivered on his promise
to raise the InheritanceTax threshold for
couples on main residences to £1 million – but
not until 2020.
Most of the deficit reduction will still
come from spending cuts in government
departments, with details to be set out in the
Autumn Statement.The Ministry of Defence
has joined the list of protected departments,
with a renewed pledge to spend 2% of gross
domestic product on it, but the Budget tax
increases will still be decent revenue raisers from a self-proclaimed
government of low taxation.
What does all this mean for investors? If the adoption of a living
wage was a surprise for business, so was the planned reduction in
CorporationTax to 18%.Most observers had thought 20%was as low
as CorporationTax would go.The drop to 18% by 2020 will mean the
rate has dropped 10% in a decade.
It is the balance between the effect of these two changes which
will determine whether the Budget was good or bad for business.
Those in catering, retail and other low-wage sectors would happily
forego the tax cut for not having to implement the new living wage.
Overall, however, the Budget probably supported recovery and, in that
sense, was a good one. Having‘economic security’, to use Osborne’s
expression, is important in the context of the planned referendum on
EU membership – promised for no later than the end of 2017 but, in
practice, likely to be held some time before that.
We know such tests of public opinion are unpredictable. Greece’s
referendum on 5 July on whether to accept the latest bailout terms
from its creditors was widely expected to be a close-run thing, with
polls suggesting that voters were moving
towards a‘Yes’ verdict.
In the event, as everybody now knows, it
was a resounding‘No’, by 61% to 39%.That,
and the fact that the pollsters also got Britain’s
general election badly wrong, suggests that we
should be cautious about second-guessing the
outcome of the EU referendum.
Even so, a couple of things can be said with
some certainty. One is that the attitudes of
UK voters towards the EU vary according
to the state of the European economy.The
current picture, one of a recovering eurozone
accompanied by major uncertainties, not least
those over Greece, is one that will not do a
huge amount to build support for continued
EUmembership.The other is that if consumer
confidence is high – a recent GfK survey
suggests UK consumers are more confident
than for a decade and a half – then people are
less likely to risk a big constitutional change
such as leaving the EU.
The uncertainty was enough for Standard
& Poor’s, the ratings agency, to put the UK’s
sovereign debt on negative watch, saying
the referendum‘represents a risk to growth
prospects for the UK’s financial services
and export sectors, as well as the wider
economy’. International investors could take
a similar view.
Lastly, a key question for investors is what
will happen to interest rates. It is so long since
we had a hike in rates – the last was in July
2007 and the last move in either direction
was in March 2009 – that we have almost
forgotten what it feels like.The signals from the Bank of England have
been confusing.While most members of the Bank’s Monetary Policy
Committee (MPC) have suggested that conditions are falling into place
for an eventual gradual rise in the cost of borrowing,Andy Haldane, the
Bank’s chief economist and MPC member, says he has no bias on the
question of whether the next change in rates will be up or down.
Eventually rates will begin to rise, and the smart money is on the
first move being in the spring of 2016, a fewmonths afterAmerica’s
Federal Reserve starts the ball rolling by raising its key interest rates.
It depends, of course, on whether the economy continues to
strengthen.The MPC keeps a close eye on wages, and the new
National LivingWage will have reinforced its belief that pay is likely to
strengthen. If so, the chancellor will not mind a gentle rise in the cost of
borrowing (and the return on savings). If not, the Bank has the luxury
of being able to stay its hand.
THE BUDGET IN BRIEF
The main measures in George Osborne’s
summer Budget:
•
A £12 billion reduction in annual welfare
spending, to be achieved by 2019-20,
including a freeze on most working-age
benefits for four years.
•
A budget surplus of £10 billion, but not to
be achieved until 2019-20, a year later than
planned in March.
•
A reduction in the Corporation Tax rate to
19% in 2017, and 18% in 2020.
•
A new Dividend Tax. The first £5,000 of
dividends will be tax free; above that, the tax
will be 7.5% for basic rate taxpayers, 32.5%
for higher rate taxpayers and 38.1% for
additional rate taxpayers.
•
An increase in the Insurance Premium Tax,
from 6% to 9.5% in November.
•
An increase in Vehicle Excise Duty, which
will see most motorists paying £140 a year.
•
Restrictions on mortgage interest relief
and wear and tear allowances for landlords:
mortgage interest relief will only be available
at the basic rate, with the change phased in
from 2017.
•
A £5 billion clampdown on tax avoidance,
including new restrictions on non-domicile
status.
•
A new £1 million Inheritance Tax threshold
for couples on main residences, to be
introduced by 2020.
•
Further restrictions on pensions tax relief
for higher earners from 2016/17.
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THE INVESTOR
IN YOUR INTEREST
BUDGET
Balance sheet
George Osborne’s Budget had the expected welfare cuts and
clampdown on tax avoidance, but the chancellor pulled a rabbit out of the hat with the
announcement of the National Living Wage and a further drop in Corporation Tax.
