After my last blog I thought I would give the new Government the benefit of the doubt and a little time to get settled. I also thought it would give me time to enjoy the summer as Westminster and market rumblings would be quieter. How wrong I was – out of the blocks with a flash was our new Chancellor, Rachel Reeves, to highlight the huge black hole she had magically found. And with it I thought, a whole heap of unintended consequences.
This hole now accommodates a bumper 22% pay rise to junior doctors spread over 2 years and an above inflation settlement with the rail unions. The latter of which hasn’t prevented these unions from threatening more strike action. The public sector is now queueing at the trough. Ms Reeves’ black hole will end up rather larger than she imagined. It looks as if pensioners will be any easy target – winter fuel allowance gone for starters and who knows what next. The threat of capital gains tax and inheritance tax increases has already seen around 8,500 of the wealthiest leave these shores – they can be easily mobile. When one considers that the top 10% in the wealth league produce 60% of our income tax revenue it should be clear how much damage driving them away will do.
Keir Starmer is proving to be a wolf in sheep’s clothing. Now he’s ensconced in No 10 his inner Corbyn is beginning to show. With a manifesto promise and continued claims that there will be no increases to Income Tax, National Insurance or VAT the ambition of plugging the £22 billion black hole Reeves has found will be a tough ask. Especially as she seems to want to resolve the situation overnight. Our economy has been in good shape, especially compared to other G7 Countries. Inflation is not far off the BoE’s 2% target – not that we hear that now. The economy is forecast to grow – currently. And interest rates are forecast to fall which will help UK PLC in financing our debt.
However, Starmer and Reeves constant grim reporting of their imagined problems are doing us no good at all. Businesses are holding off on new employment and delaying commercial decisions. This government seems determined to undermine the economic growth it promises to create.
Unfortunately, I feel we are in for a rather “painful” Autumn budget as Sir Keir said, with rash decisions made without the consequences considered. Unlike the application of VAT on private school fees and the scrapping of winter fuel payments, I hope the implementation of any changes to CGT, IHT and others will start from the new fiscal year and be means tested (unlikely). To at least give people and families the ability to plan. Education’s cost to the taxpayer at just over £100 billion, 10% of Treasury intake. The Government would be better served encouraging families to put their children through private education, not deterring them. With VAT imposed from January, it will force families to reconsider and potentially rely on the struggling state system. The small increments that will be received from VAT may well be outweighed, unintended consequences of short sightedness.
Politics in the US is also highly entertaining. Joe Biden leaving the contest has made it far more interesting and a much more closely contested race to the White House. The sums Kamala Harris has drawn in are nothing shy of exceptional. The recent televised debate drew a further $47 million to her campaign a mere 24 hours after the conclusion. To say she is more composed than Joe Biden is a huge understatement. I am not sure the performance was worth that much though. Whoever wins the race to the White House, will have $1 trillion of excess bills to refinance by early next year. All coinciding with the next deadline for the Congressional debt ceiling negotiations. Rather them than me!
Many clients will have seen the recent purchases of UK Government debt. With interest rate cuts on the horizon, locking away attractive coupons on various timeframes has been a good diversifier. I have tended to stick with the shorter dated treasury & bonds. For those with space in their tax-free wrappers (ISA/Pensions) and a long-term outlook. The UK Treasury 4.25% 2046 trading under par still looks attractive. Even if you don’t wish to retain them for their duration, with rate cuts likely the capital value should rise in accordance representing a gain that at present, will be CGT exempt.
