Weekly outlook

Do-little Budget a relief for savers and investors

By Tom Stevenson, 22 April 2009

Cash-strapped Government left with no room for manoeuvre

Presenting Alistair Darling’s second Budget was an unenviable task. However much the Chancellor of the Exchequer sought to present the economic downturn as a global phenomenon, it was impossible to disguise the scale of Britain’s local problems, especially the state of the public finances. Largely because of this, there was little room for hand-outs and savers and investors received predictably thin pickings. First the good news. Investors in Individual Savers Accounts will be able to keep another £3,000 a year from the tax-man (£6,000 for couples) thanks to an increase in the annual ISA allowance from £7,200 to £10,200. This is an acknowledgement that the current allowance has failed to keep up with inflation in the 10 years since ISAs replaced PEPs and Tessas. The fact that a couple can now put more than £20,000 a year aside in tax-advantaged savings means that most people need never worry about capital gains tax or indeed telling the tax-man about their investments at all.

"The market took dreadful public finance figures in its stride" Tom Stevenson

The second piece of good news is that for all but a tiny minority of people, the government has stepped back from fiddling with pension contributions for higher-rate taxpayers. At first glance, it looked as if the Chancellor was indeed having a pop at the retirement savings of higher earners but closer analysis shows that he has his sights trained only on the very wealthy who have been using pensions as a tax dodge rather than on anyone genuinely saving for when they stop work.

As ever with recent Budgets, the real story was hidden behind several layers of complexity. For example, the new ISA limit applies to the over-50s this year and to everyone else next year. It is not clear what benefit this creates for anyone but then simplicity has never been top of the Government’s priorities!

Another measure that will only be of immediate interest to a small number of people but which everyone else should watch carefully is yet another change in income tax bands. You will probably remember that in November’s Pre-Budget report the Chancellor announced an increase in the top rate of income tax from 40% to 45% for those earning more than £150,000. There were also changes to the personal allowance for those earning more than £100,000 (yes, more complexity, I’m afraid). Well five months on, and before they were even implemented, the rules are changing again. The most important change is that the 45% rate becomes 50%.

This is notable for two reasons. First, because the increase in the top rate of tax to 45% was itself a U-turn on a manifesto pledge by the government. Second, because the change has been so quickly changed again. It would not be unreasonable for savers and investors to look at the proposed pensions regime changes and wonder how long the squeeze will be restricted to super-high earners. A government in need of money is a dangerous beast.

The extent of the government’s need for cash was laid bare by the Chancellor in his Budget speech. The shortfall between tax income and government spending this year will be £175bn, an eye-watering amount on its own but even more scary when you consider how slowly this borrowing requirement is expected to reduce. The figures for the next four years are £173bn, £140bn, £118bn and £97bn.

This new borrowing means that total government debt will rise to 79% of national income by the end of this forecast period, around twice the limit the Government recently held itself to as part of its self-imposed fiscal rules.

What does this mean for investors and savers? Clearly, the public finances are not good news. They suggest that recovery from the recession could be a hard slog and that taxes must rise after the next election and public spending fall. That is bad news for many companies that rely to a greater or lesser extent on government spending or consumer confidence.

But the response of the stock market to this poor news was telling. The FTSE 100 index spent most of the day in positive territory and the market as a whole is clearly no longer surprised by the scale of Britain’s economic problems. This is very important because resilience in the face of bad news is a good indicator that a market may be close to finding a bottom.

The reasons for thinking the worst may be over for the market remain – a slowing rate of economic deterioration and historically attractive valuations, for example. Meanwhile, the tax-breaks offered by the Government are still compelling, even if the Chancellor chose to ignore our call for the re-instatement of the tax credit on dividends from shares held in an ISA. Not much in the Budget for savers and investors then, but given the scare stories ahead of time, that is not such a bad result.