Philip Hammond walks into one of the most unusual economic environments I have known in my 30-year investment career. The monetary policy experiment we’ve witnessed since the financial crisis has probably reached its limits, while the pro-‘Brexit’ vote means we’re facing an economy that may grind to a halt over the next few months, not through a traditional credit boom being reined in by the central bank, but simply in response to the referendum result. The question the new chancellor will have to ask himself is: is further monetary stimulus really enough, or is it time for the baton to be passed on to fiscal policy?
The Treasury can take a number of measures to help boost the economy, such as reducing stamp duty or cutting tax on petrol. However, I believe that we might eventually see more extreme fiscal stimulus: debt issuance to help back private sector or government schemes for infrastructure projects. Such fiscal stimulus is being planned in Japan in recognition that monetary stimulus alone is insufficient. Ideally, any such move amongst the major economies would be co-ordinated, but if Japan has led the way, it is perfectly possible to see the UK and the US following suit.
The major drawback of loosening fiscal policy independently of other major economies is that a rising budget deficit could see foreign investors requiring a cheaper currency to attract their investment – potentially yet further weakness in sterling.
The Bank of England has acknowledged the limits to further monetary stimulus, but equally cautioned that the Government must remain fiscally prudent and responsible. Against the ‘protest vote’ referendum result, however, the chancellor has to find the right balance between stimulating the economy, managing debt and pleasing the crowd by reducing income inequality. That is an enormous challenge. History suggests that in modern democracies the temptation to inflate your way out of trouble through stimulus and debt devaluation ultimately prove irresistible. The next few months are undoubtedly going to be interesting and we will be looking to take advantage of the opportunities as they present themselves.
Richard Buxton is head of UK equities and CEO, Old Mutual Global Investors
Tax and financial planning
The new chancellor could look to suspend stamp duty on homes under £500,000. With the average house price at £282,000 it could provide the required stimulus for the market during a period of exceptional uncertainty.
There is a precedent for a Conservative government temporarily suspending stamp duty. In 1991 chancellor Norman Lamont suspended stamp duty for nine months on all properties worth less than £250,000 in an attempt to stimulate the housing market. This resulted in a jump in new mortgage approvals from about 70,000 to about 90,000. It also came in time to help deliver victory for John Major in the April 1992 general election.
In the financial year 2014/15 HMRC received £7.5bn from residential stamp duty of which 47% came from properties under £500,000, compared to about 64% in 2006/07.
Suspending stamp duty for property purchases below £500,000 for nine months would cost the Treasury approximately £2.6bn. The new government may see this as an acceptable price to pay in order to keep the property market ticking over.
[Previous chancellor] George Osborne hiked stamp duty for buy-to-lets and second properties as recently as April with a 3% surcharge. This serves to help first time buyers and is unlikely to be overturned any time soon.
Cuts to corporation tax were already firmly in George Osborne’s sights to help boost the post-Brexit economy. When the coalition government came into power in 2010, corporation tax stood at 28%. The rate is now 20% and George Osborne said in March he would continue cutting down to 17% by 2020.
In light of the Brexit vote, the new chancellor could be more aggressive and take the UK below Ireland’s rate of 12.5%, tempting companies to stick with their British bases rather than move to the EU member state across the Irish Sea.
This would also lessen the burden on SMEs as he seeks to encourage more businesses to export. For entrepreneurs, business-owners and investors in British businesses, a cut in corporation tax would provide a welcome boost.
Similarly, the chancellor may want to take measures to stimulate investment in smaller businesses that can be vulnerable during periods of financial turmoil.
The 2016 Budget saw a significant tax boost to Enterprise Investment Schemes (EIS) with deep cuts to capital gains tax. The CGT rate fell from 28 per cent to 20 per cent at the higher end, and from 18 per cent to 10 per cent for basic rate taxpayers. This came into effect in April this year.
He could choose to build on the reliefs afforded to EIS, Venture Capital Trusts (VCTs) and Seed Enterprise Investment Schemes (SEIS) or look to extend the annual investment limits in order to encourage savers to invest in innovative firms in need of growth capital.
Tax and non-domiciles
The UK government had previously announced plans to change the way that long term UK resident non-domiciles are taxed but these changes could be put on hold.
The rules were a big focus in the 2015 election, with some arguing that it is unfair to tax individuals at UK rates on money they have earned elsewhere, while others argue that non-doms benefit from living in the UK without contributing a fair amount of tax.
Last year chancellor George Osborne pledged to reform non-dom rules. The government planned to stop people living in the UK for decades without ever becoming subject to UK tax on their overseas wealth. The plan is that an individual that has lived in the UK for 15 out of the last 20 years should be deemed domicile for all UK taxes, with the rules to be changed from April 2017. So someone living in the UK for 16 or more years between 1997 and 2017 would have to become UK domiciled for all tax purposes.
In the current climate, however, it is possible that the new Chancellor may choose to delay the changes, deciding that it is not the time to be introducing complex measures that risk discouraging people from residing in the UK.
Rachael Griffin is a financial planning expert at Old Mutual Wealth
Pensions have been subject to major reforms under the previous chancellor, George Osborne. What we need from the new chancellor is a period of stability.
The new chancellor should reflect on whether extending the Lifetime Isa is the right course of action. Further moves towards a pension-Isa will introduce unwelcome complexity for existing savers, undermine auto enrolment and introduce the political risk of savings being taxed again when taken.
Plans to curb pension tax relief should also be put on the back-burner. Data* we collected earlier this year shows that over half of financial advisers believe there would be a drop-off in pension saving if higher-rate tax-relief were cut. Now is not the time to discourage long-term savings.
Similarly, the creation of a secondary annuity market needs careful consideration to ensure it is in the best interests of the people it is trying to help.
Jonathan Greer is a pension expert at Old Mutual Wealth