<< BackBudget Response
Posted on Wednesday, June 23, 2010
Yesterday’s budget contained very few shocks.
Market reaction was virtually zero. Gilts barely moved whilst sterling rose very slightly. The stockmarket did virtually nothing, although bank shares rose slightly as the proposed bank levy was lower than many thought.
From a financial planning point of view, the big change was to Capital Gains Tax. We expected this to rise, and felt that it could be brought in line with income tax, meaning potentially 40% or even 50% tax on gains for higher rate tax payers.
In the end, CGT remained at 18% for basic rate tax payers and was raised to 28% for higher rate.
This means that for some clients, we may be more likely to recommend you invest in investment bonds, although many clients would still be better holding funds directly.
The other big changes, but again one that was expected, was the announcement to increase VAT to 20%.
From an economic point of view, this rise was one that probably needed to happen in order to help the government reduce the budget deficit and retain the confidence of currency and bond markets. However, the concern is that the rise in VAT may stop people spending, leading to a reduction in economic growth and potentially a “double dip” recession.
To combat this, the rise will not happen until January 2011. This means that there may even be a short term boost to economic growth prior to the end of the year, as people try and beat the rise and make big purchases beforehand.
The hope is that by the time the VAT rise comes into effect, economic growth may be stronger and consumer confidence much greater. Whether this is the case remains to be seen, however announcing the rise well in advance would seem to be a smart move.
One point to note is that inflation will inevitably be impacted by the VAT rise. Even though core inflation is predicted to fall back towards the end of this year, there will be a short term rise again in the new year.
Mike Deverell