5/1/08Darling’s budget for the young, the old and the planet...

A neutral budget was not only to be expected but may even be welcomed; few headline-grabbing, but meaningless, initiatives.

On the other hand, some positives such as helping more children out of poverty, increasing the winter fuel allowance and using the tax system to encourage greener living, were balanced by missed opportunities to help many more.

In particular, the Chancellor failed to aid the housing market by overhauling the stamp duty regime; or even simply increasing the thresholds at which increased rates apply.
He could have dramatically eased the homes market simply by altering the way stamp duty applies by introducing ‘top slicing’, where the rates only apply above each threshold, rather than from the ‘ground up’.

He could also have helped encourage greater savings by making a significant increase to the ISA limits, rather than simply adding £200, of which up to half can be in cash.

Rather more important to investors is his failure to reverse the situation, introduced some years ago by Gordon Brown, whereby ISAs and pension funds are unable to recover the tax deducted from dividends paid by UK companies.

Similarly, although an increase in the EIS investment limit from £400,000 to £500,000 is welcome, as will be the consultation on new proposals to limit the amount of regulation that can be imposed by Whitehall, SMEs gain no relief from the increased corporation tax rate, which is now higher than the basic rate of tax.

The economy

Despite concerns amongst investors over the effects of the credit crunch on equity markets, the Chancellor claimed that the economy is in good shape, with inflation set to fall back below the 2% CPI target.

While he also quietly downgraded his forecast for economic growth to 1.75%/2.25% for 2008/9—increasing by about half a percent the following year—this compares favourably with some other leading economies. It will, however, affect his revenue generating capacity and borrowing will rise to £43 billion next year.

Investments

The overall message that can be drawn from the budget for investors is probably positive. There are no major initiatives that are likely to make things worse and some signs that concerted action by the world’s central banks will help to ease credit for
lenders, making it less difficult for them to lend to those with poor credit histories. This is good for everyone, since a squeeze at the bottom end of the housing ladder slows the housing market generally.

Abandoning the deeply unpopular—and largely useless—Home Information Packs would also help the flow of new property onto the market.

The overall message for investors could well be: ‘steady as she goes’. There is no reason to think that markets will not recover over the longer term; selling at the bottom is never a good idea.