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The Chancellor is leading the country towards a fiscal reckoning, but he is in less of a hurry to balance the books than we were encouraged to think before yesterday’s Budget. Rightly so - the Office for Budget Responsibility believes the economy will still be 3% smaller in 2026 than it would have been without the pandemic. Recovery remains the priority.
The main focus of Rishi Sunak’s second budget was once again on ‘doing whatever it takes’ to build a bridge from the pandemic to the better times that he hopes lie ahead. The list of support measures is long, expensive and very well trailed.
The first leg of his three-part pandemic plan continues to be: protecting jobs, helping the self-employed, cushioning the blow for the lowest paid and protecting the smallest and most vulnerable businesses. Opposition leader Keir Starmer will wonder how he can make Labour look different.
The second part of the plan - the bit we were worried about - was a carefully calibrated mixture of stick and carrot.
First, the stick. The hike in corporate tax from 19% to 25% - albeit with a two-year delay - is at the top end of expectations. It still leaves the UK just about competitive versus G7 peers but shareholders in the largest, listed companies that will bear the brunt of the measure, will not welcome this reversal of ten years of lower company tax.
Then, the carrot. The introduction of a £25bn ‘super deduction’ that could encourage a two-year investment boom is a clever innovation. Deducting 130% of an investment from taxable income is the equivalent of a 25% marginal tax cut. Cynics will call it a distraction from the main measure, but it incentivises job creation and productivity improvements, both of which will be essential if we are to grow ourselves out of this £400bn pandemic black hole.
And growth is the only viable exit from the highest debt to GDP ratio since the 1960s. The spending cuts and tax rises that would be required to make a dent in the UK’s debt burden would wreck the economy.
Which is why the Chancellor is right to add a third leg to the recovery plan, building a competitive green economy for a post-Brexit, post-pandemic world. Creating eight ‘freeport’ special economic zones is less innovative than Mr Sunak might claim. They will look very familiar to Michael Heseltine. But they are a good idea, nonetheless.
That they will help entrench the Conservatives in a number of the ‘red wall’ constituencies they borrowed from Labour at the last election is no coincidence, of course. But just because something is politically expedient is not necessarily a reason to carp if it is the right thing to do.
The Budget was notable for some of the things that it didn’t say. The only mention of Capital Gains Tax was to confirm that the exempt allowance remains frozen. Ditto inheritance tax and the lifetime allowance.
This naturally does not preclude bad news in three weeks’ time when the Treasury stages its new ‘tax day’. However, the thrust of today’s Budget speech was pro-enterprise, so there remains a flicker of hope for those entrepreneurs and others sitting on uncrystallised capital gains.
The principal personal taxation measure was well flagged. The freezing of personal tax allowances until two years after the next election means that this ‘stealth’ tax can be quietly forgotten about for the foreseeable political future. It is worth a useful £8bn a year to the Government.
So, what are the implications for investors? The biggest impact clearly is the bigger than forecast hike in corporation tax - it will reduce company profits by £17bn a year by 2025 - but the stock market barely wobbled on the announcement. We knew something like this was on its way even if not quite the scale of it.
Property buyers will receive a short extension to the stamp duty holiday and then easier terms until the autumn. More first-time buyers will be encouraged to climb onto the ladder with a 95% mortgage, which should continue to support prices.
Savers and investors were offered the promise of a ‘green savings bond’ via National Savings & Investments but nothing tangible when it comes to the £20,000 contribution limit for ISAs or £9,000 for Junior ISAs.
This was a smart Budget from a smart Chancellor who has played a difficult hand well. The hike in corporation tax shows that he is not incapable of tough decisions. Sadly, it won’t be the last he is obliged to make.
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