Tag: Chancellor’s Statement

More Comments on the Autumn Statement

Here are some more comments on the Chancellor’s statement to add to those previously made.

The cuts to National Insurance are substantial. As someone who retired from paid employment over 25 years ago, I won’t get any benefit from that but maintaining the “triple-lock” on state pensions will offset that and mean a rise of 8.5% next year. I think reducing employment taxes was a sensible way of distributing the largesse available to the Chancellor. But personal taxes are still too high overall mainly due to fiscal drag from reduced indexing of allowances.

Retaining 100% capital allowances for businesses will please many companies but I am not sure investors will be that impressed. It might simply mean capital is wasted on projects with a poor return.

  • On ISAs it was argued by some that simplification should take place to make them more attractive. But the Chancellor has ignored that and made them more complicated. For example by permitting ‘certain fractional share contracts’ as eligible ISA investments. This is a recipe for encouraging speculation by unsophisticated investors rather than long-term investment and is simply unnecessary.
  • The Chancellor is proposing a retail offer to dispose of its remaining holding in National Westminster – the remains of its former holding in Royal Bank of Scotland. Investors should take a very jaundiced view of such an offer. Investing in bank shares is always tricky due to lack of transparency in their accounts (for example on cash flows) so I am personally unlikely to take up such an offer. But it’s certainly good for the Government to exit its holding if it can do so.
  • It has been confirmed that the lifetime allowance will be scrapped from pension rules from April next year, as previously announced by the Chancellor. This will make it more difficult for any future government to re-introduce the lifetime pension cap as Labour has pledged it would do if elected.
  • Other welcome news is on the treatment of pensions on death. Under current rules, if you die before age 75 your beneficiaries can inherit your defined contribution (DC) pension completely tax-free if it is under your lifetime allowance. HMRC has announced that, contrary to previous plans, this situation will continue.
  • The Government is to consult on allowing any house that can be converted made into 2 flats provided the exterior remains unaffected. This could get a lot of opposition in Chislehurst where I live. It would increase population density and traffic/parking problems with inadequate public infrastructure such as schools and medical facilities. Instead of tackling the underlying problem of excessive population growth this is a “sticking plaster” solution to housing shortages.
  • There will be £1.3 billion spent on helping 700,000 people with health conditions find jobs. Does that mean that I will be asked to take up some part-time job working from home or lose my attendance allowance? There are certainly too many people of working age and with minor health problems that are living on state benefits at present. I can foresee a lot of resistance to this proposal but it is a problem that needed tackling. Too many people are reliant on the social security system and the cost is one reason why we have high taxes.

Will the tax and other changes help the Conservatives to win elections? I doubt it. They are simply not revolutionary enough.

Roger Lawson (Twitter https://twitter.com/RogerWLawson  )

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Brief Comments on the Autumn Statement

This is kind of Chancellor’s statement that I like. No big surprises that would cause panic in financial markets. The threatened “tax cuts” are not all that evident but at least my state pension will be going up substantially next April.

ISA changes are relatively minor but this statement gives me some concern: “expanding the investment opportunities available in ISAs to include Long-Term Asset Funds and open-ended property funds with extended notice periods”. This makes no sense and is a recipe for future mis-selling claims.

But there is a commitment to legislate to extend the Enterprise Investment Scheme (EIS) and Venture Capital Trust (VCT) schemes to 2035 which will remove concerns about the sunset clause in existing legislation.

The Government is still intent on throwing money at what it perceives as hot sectors with this comment: “Funding of £4.5 billion has been announced to help unlock private investment in strategic manufacturing sectors, starting in 2025-26 and lasting for five years”. What is the justification for subsidising commercial ventures?

This is an interesting statement by the Chancellor: “The UK is uniquely placed to harness the power of health data to improve patient outcomes. In England the NHS has 1.6 million patient interactions every 24 hours generating real world experience and insights at scale. The government is therefore announcing a further £51 million for the Our Future Health (OFH) programme, a world-leading resource for health research, to genotype their first 1 million participants and to recruit hundreds of thousands of new volunteers, supporting the development of better ways to prevent, detect and treat diseases”. That is a useful project.

More comments may follow on the Chancellors Statement after I have digested it more fully.

Roger Lawson (Twitter https://twitter.com/RogerWLawson  )

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Interest Rate Sanity and Chancellor’s Announcements

The Bank of England’s announcement of an increase in base rate to 2.25% was just one step in a return to sanity. With inflation nearing 10% why would any idiot lend money at 5% or less as many mortgage providers have been doing. In reality the last few years have seen lower interest rates than have been available for the last 5,000 years.

This has been possible because of Quantitative Easing (QE) to keep the economy afloat. A misguided policy that has resulted in horrendous side effects. It has resulted in property price bubbles and stock market bubbles. When you can borrow money at 2% and use it to buy houses which have been rising in price at 8% or more (as they have done in 2022), people will buy houses as an investment – and the bigger the better. This is one key reason why house prices have been rising to levels that make them unaffordable to those not yet on the bandwagon.

Yes it will mean the cost of mortgages will rise thus making some people poorer for a while. But it is a necessary step to return the UK economy to a rational position.

It is still some distance from enabling savings rates to return to a situation where savers can obtain a real return. This has encouraged speculation in alternative investments that might promise a higher return. This was one reason why small cap AIM shares have been popular in the last few years. But that bubble is now bursting – the AIM index is down 31% so far this year.

In summary, I welcome the rise in bank rate and it should preferably go further to match inflation rates or more.

Chancellor’s Announcements

Kwasi Kwarteng has today announced a number of things including tax cuts.

The 45% top rate of income tax is scrapped and base rate reduced by 1% earlier than planned. The planned increase in National Insurance is scrapped and stamp duty reduced, while the planned increase in Corporation Tax is also cancelled.

The chancellor confirmed that the scheme to protect households and businesses from rising energy prices is expected to cost £60bn for the first six months. With the aforementioned tax cuts, the resulting likely increase in Government debt has caused a sharp drop in the price of gilts (and rise in their yield).  

It has also meant a falling pound which will not help the cost of living but will help exporting companies and those with revenues in dollars. By making imports more expensive it should stimulate UK production – for example of food and make us less reliant on imports.

A surprise announcement is the winding down of the Office of Tax Simplification (OTS) and revision of the IR35 rules. These are sensible moves as the OTS has been totally ineffective in simplifying the tax system which is horribly complex while IR35 rules have been incomprehensible and impractical to apply in the real world without adding massively to bureaucracy.

More reforms to planning laws are promised to stimulate infrastructure building and aid the Government’s growth agenda but we have heard that before. Unfortunately planners just love complex regulations as they generate work for planners and there will be resistance from nimbies so I expect this will see major objections and delays.

There will be new anti-strike laws for essential services and there will be encouragement for 120,000 people on universal credit benefits to “take active steps to take more active work or face having their benefits reduced” (the number of inactive people in the workforce has been rising while jobs go unfilled).

In summary, my personal opinion is that that these are positive moves on the whole. In the short-term, we might all be poorer but some of these reforms were well overdue.  

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Chancellor’s Statement – Eat Out to Help Out

I just watched the statement by Chancellor Rishi Sunak. He made some good rhetorical points which I pick out here:

He said the Government is “doing what is right” and is focused on job protection and creation. We are in the “second phase of our economic response to the virus”. The economy has contracted by 25% and we face significant job losses. But with the furlough scheme winding down to October, the measures are:

  1. A job retention bonus of £1,000 for each person who comes back from furlough (if all 9 million return, a cost of £9 billion).
  2. A new “Kickstart” scheme will pay employers for 16-24 year old staff for 6 months.
  3. Funding for new apprenticeship and trainee schemes
  4. £1 billion for the DWP to provide more support.

The Government is also investing in infrastructure to create jobs including £2 billion in green investment – for example in grants to improve the energy efficiency of homes. To improve confidence in the housing market, stamp duty is being cut temporarily as from today.

As our economy relies on “social consumption” (cafes, restaurants, etc.), there will be a cut in VAT from 20% to 5% on that sector for the next 6 months – at a cost of £4 billion. In addition, for August you will be able to eat out at a discount of 50% on Mondays to Wednesdays, funded by the Government. The Chancellor concluded with the phrase “Eat out to help out”.

There was a weak response from Shadow Chancellor, Anneliese Dodds who focused on the medical responses to the epidemic rather than the Chancellor’s statement.

Comment: It looks like the Chancellor wants us to put on even more weight by eating out. Encouraging folks to eat out may improve their “feel good” factor but this is a very temporary gesture. As regards the job protection and creation measures, these may help some people but will they really boost the economy?  

The hospitality sector, and companies in it, will clearly benefit from these measures, and it might encourage people to eat out. But I fear that many people like me will be reluctant to take the risk until it is clear that the epidemic has really disappeared.

The encouragement for people to return to work and the clear intention not to extend the furlough scheme is surely a sound policy as otherwise it would be too expensive while people would get out of the habit of working.

In summary I would suggest these policies may assist, but what really matters to improve the economy and employment is more confidence that the epidemic is fading away, and that will take time.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Chancellor’s Statement, EIS Funds and EMIS Results

The Chancellor’s Spring Statement yesterday was generally positive but there are some aspects that it’s worth talking about. Mr Hammond was right to be cautious because although new Government borrowing is falling, the total debt is still rising. It’s only forecast to fall as a proportion of national income by 2020-21 because of rising GDP. There is “light at the end of the tunnel” as the Chancellor put it, but it’s still some distance away.

GDP is only rising slowly and it is forecast by the Office of Budget Responsibility (OBR) to be rising at near 1.5% in the next few years which is not exactly rapid. The OBR also forecast that we will have to pay £41 billion to the EU after Brexit as a settlement of our obligations, although it will also free up £3bn or more per year that can be spent on other things, i.e. they suggest in the long term we will save money but the impact of changes in migration and trade terms might be more significant.

The Labour party wants the Chancellor to free up the purse strings and increase expenditure on the NHS and other areas. The Government could only do that by borrowing more which would not only increase the cost of their debt but would seem unwise given the economic outlook and the uncertain impact of Brexit. Because of an ageing population, but a growing one, more money will need to be spent on local authorities and the NHS anyway but the growth in productivity remains poor which ultimately determines the wealth of the nation.

Will the estimated figures have an impact on likely future interest rates (which have a significant impact on stock market investment)? Interest rates might need to rise somewhat to make Government debt continue to be attractive but it is not obvious that the economy is overheating as yet – inflation seems to be driven more by rising import prices as the pound has fallen rather than wage rises. The Government will no doubt be keen not to increase the cost of its debt, even if it has only indirect influence on the rate. Interest rates lower than real inflation are a good way for the Government to reduce its debts however much it prejudices savers.

One interesting mention for investors was a mention of a consultation on EIS funds that includes several options for more tax reliefs to encourage investors to put money into early stage “knowledge-intensive businesses”. That might include tax free dividends (only available on VCTs at present), or capital gains exemptions. I may write some more on this topic after reading the full consultation document which is here: https://www.gov.uk/government/consultations/financing-growth-in-innovative-firms-enterprise-investment-scheme-knowledge-intensive-fund-consultation . Investors interested in this subject should of course respond to HM Treasury’s consultation.

Some Venture Capital Trusts (VCTs) have fallen in price today. Perhaps because they might be perceived as less attractive to investors if such new EIS funds were introduced. But they would surely be very different beasts even if they might provide more competition for new investor subscriptions.

Comment: having invested in both EIS funds and directly in EIS qualifying companies in the past, I have vowed only to do the latter in future. Finding an experienced fund manager in early stage companies who can pick out the good EIS businesses is not easy and the lemons they pick ripen quickly (a common VC adage) while the good investments can take years to mature. If there is very generous tax relief (at a level where investors ignore the merits of the underlying investee companies because the tax reliefs are so generous it looks like they can’t lose money), then this will encourage all kinds of dubious promoters to enter the field.

One company that is sensitive to Government spending on the NHS is EMIS Group (EMIS). They announced their Final Results this morning. They previously warned in January that they had breached their service level obligations to the NHS and the cost might be “in the order of upper single digits of millions of pounds”. I commented on the company then and still hold some shares in it. The actual damage is a provision of £11.2 million in these accounts for a “financial settlement and costs to remedy past issues”. The share price rose today perhaps in relief that the news was not worse.

Few more details of the contract breach are provided and when I talked to my GP who uses EMIS-Web and used to be active in their user group, he knew nothing about any service failures. All rather odd.

Even excluding that item which is being treated as an exceptional cost, the figures were disappointing though. Revenue was only up 1% and adjusted earnings were down 4%. The CEO commits to a “robust management of legacy matters” and a commitment to being “more performance-led with greater accountability, improved operational execution and an increased focus on our customers”.

Dividend has been increased though which suggests some confidence in the future, putting the shares on a yield of 3.5% and a possible forecast p/e of 16, but the company certainly needs to show better signs of growth if the share price is to get back to where it used to be a couple of years ago.

The Government might spend more in the Autumn budget, but whether EMIS will see much benefit remains to be seen.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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