Chancellor George Osborne is preparing to present his third budget as pressure mounts for more measures to stimulate the floundering UK economy.…
Azad Zangana, European Economist Schroder
For professional investors and advisers only.This document is not suitable for retail
The Chancellor’s coalition partners are pushing for a greater rise in the threshold for the standard rate of income tax, while his own supporters would like to see the 50% top rate of tax removed. Predictably, government bond investors and the sovereign debt rating agencies would like the Chancellor to pocket the unexpected windfall, having recently warned that any slippage would lead to the UK losing its coveted ‘AAA’ sovereign debt rating.
We expect the Chancellor to focus on growth measures that will not dent the exchequer. For example, the credit easing scheme will help to reduce the cost of credit through guarantees for small and medium-sized companies, while the leasing of parts of the national roads system could help boost investment in infrastructure in the future. However, we believe that while the credit easing scheme is useful, it remains too small at just £20 billion. Meanwhile, the private infrastructure investment scheme may help to boost investment in the future, but this is unlikely to boost growth in the near term, and there is a risk that companies may fail to make progress with monetising their new investments.
With regards to taxation, the income tax threshold is clearly on the agenda, but in order to fund a cut in the top rate of tax, the Chancellor will have to find a way to recoup the losses to the exchequer (likely to be small) with other measures, which we expect will focus on tax evasion with the use of foreign holding companies to purchase UK properties, rather than the ‘mansion tax’ which is favoured by the Liberal Democrats.
Finally, rumours are rife that the Chancellor may reduce pension tax relief for higher earners. While the move could discourage pension saving and may therefore boost consumption and growth, there is a risk that households increase their pension contributions further in order to make up for the fall in the net value of their contributions.
Overall, we expect the Chancellor to keep a tight rein on the public finances, with very little being given away. The focus will remain on boosting growth and employment, but not at the risk of losing the UK’s credibility with investors.
Disclaimer:
The views and opinions contained herein are those of the Azad Zangana, European Economist and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds.
For professional investors and advisers only.This document is not suitable for retail clients.
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Source: ETFWorld – Schroders
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