With Chancellor Rachel Reeves set to deliver her first Budget on 30 October, Premier Miton’s Chief Investment Officer Neil Birrell shares his views in this Q&A.
For information purposes only. Any views and opinions expressed here are those of the author at the time of writing and can change; they may not represent the views of Premier Miton and should not be taken as statements of fact, nor should they be relied upon for making investment decisions.
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“The most anticipated Budget in living memory”
It doesn’t matter where you are, it is being talked about in offices, homes and pubs across the UK. Depending on the place, the exact topics may vary from inheritance tax and pensions to prospects for the economy or how financial markets could fare. All are important subjects. Here Neil Birrell explains why this month’s Autumn Budget has become “the most anticipated Budget in living memory”.
Q: Do Budgets tend to spook markets and damage portfolios?
In the past Budgets have generally been relatively dull, with the focus often being on income tax, alcohol duty and road tax. Although the Liz Truss Government’s not-so-mini budget in September 2022 is an obvious exception. Since the global financial crisis there has been a much more attention on public sector finances in general. That’s because of the level of debt that the UK government, as well as other major economies around the world, have all taken on, which was then turbo charged by the cost of COVID.
That is what the Chancellor is trying to address in the upcoming budget, although there are different ways of going about it.
Given the approach being adopted by the new government, who have not been able to influence policy for 14 years, this has become the most anticipated budget in living memory.
In cash terms this could be the biggest tax raising budget in history, with estimates as high as £40bn being sought from tax increases and spending cuts.
On the face of it; yes, that could spook markets and damage your investments. However, we have a good idea of what’s coming, so it should have been taken into account by investors and therefore reflected in financial market prices. The key is to work out what the impact of it all is.
Q: Are there any specific tax changes people are worrying about?
Capital Gains Tax is an interesting one, if there is such a thing as an interesting tax! It was first introduced by the Labour government more than 60 years ago. Over time, policy has varied between a higher rate with higher reliefs (such as tax-free allowances available) and a lower tax rate with fewer reliefs. It has been widely reported that Rachel Reeves is considering higher rates with fewer reliefs. It is not a major revenue raiser for the Government, but it will impact some individuals.
Inheritance tax which generated £4.3 billion between April and September this year, is also rumoured to be in the spotlight.
Q: What impact could the Budget have on different types of investments?
Gilts are bonds issued by the Government. They are their main way of borrowing money and are bought by big domestic and international institutional investors such as pension funds as well as private investors. There are clear ramifications for how much the government will need to borrow if it follows through with its spending plans over the next five years. Some estimates suggest they could issue an enormous £80 billion of gilts. If that comes to pass, it is likely that the buyers will extract a price for that, in the form of higher interest rates paid by the gilts, making it more expensive for the government to borrow. That would also have a negative impact on existing gilt prices and maybe those issued by companies as well.
Companies could be hit from two sides. Firstly from higher costs in the form of increased National Insurance contributions and potentially other tax increases which may come from the Budget. There are also changes expected to employment legislation, which could affect how companies hire and retain staff, again, potentially impacting on profitability. Furthermore, economic conditions and consumer sentiment are important factors influencing business conditions for companies. It’s better if they are a positive influence and the Budget could have short, medium and long term ramifications. However, it is reasonable to assume that we have been given very big clues as to what is coming in the Budget. They should have been taken into account already and with the UK equity market looking cheap by historic and international comparison, maybe there is not too much to fear. Positive or negative surprises could have an impact though.
Q: Which sectors could be winners or losers?
The devil is often in the detail with Budgets, so it is difficult to know if there will be any specific winners or losers. As usual there could be an increase in alcohol duty, which could affect drinks manufacturers and the hospitality industry. There could be other specific impacts as well, however. News on plans for housing, infrastructure and the National Health Service, which are long term investment projects could result in moves in the share prices of companies involved in those industries.
Q: Is there any good news?
Yes. The Truss Budget provided a salutary lesson for all future Chancellors. It did real harm to the UK financial system, government finances and individual investors. It is unlikely that the same mistakes will be made again.
Also, with many details of the Budget being openly discussed by members of the Government and in the press, investors will have been taking this into account in their decision making for a while now. It could be that once the budget is out of the way, the uncertainty is removed and we move onwards and, possibly, upwards. As long as there aren’t any nasty surprises.
Neil Birrell
Chief Investment Officer
