A lack of blaring headlines in this morning’s newspapers, with yesterday’s budget announcement not even the main headline for many dailies, both broadsheets and tabloids, speaks for itself. It’s probably just about as good a result as possible for Phillip Hammond. The Chancellor had the unenviable task of trying to ease back on austerity while juggling a tight budget and reporting that the UK’s economic growth outlook appears to be a bit grim.
Most of the headlines have been reserved for the abolition of stamp duty for first time buyers, at least on the first £300,000 of the cost and only if the property has a maximum purchase price of £500,000. There is likely to be little in the way of complaint that first-time buyers who can afford a ‘first-step-on-the-property-ladder’ abode valued at more than £500,000 miss out and will still have to pay stamp duty. Housing, the NHS and the young were the biggest beneficiaries yesterday and the gloom was provided by Hammond’s gloomy outlook for economic growth, which was significantly more negative than recent Bank of England forecasts. That has also sparked some debate as to whether the pessimism injected on that front isn’t a political ploy of the ‘under promise and over deliver’ variety.
Changes, largely of a positive nature, to tax-efficient wrappers like ISAs and SIPPs have been major talking points after budget announcements in recent years though there was no tinkering there yesterday. Buy-to-let-landlords owning investment properties have also been a recent target of budgets and there was again the announcement yesterday that more of the tax benefits they have previously enjoyed are to be halted. This perhaps suggests that hitting investment property owners in the pocket is now seen as easy political capital and likely to be a continuing theme of future budgets.
But what are the main ‘take aways’ from the perspective of investors that came as a result of yesterday’s budget release? Let’s take a look at how the budget itself and forecasts made might impact on the UK’s economy, financial markets and industries as well as any specific changes to taxation rules around particular forms of investment.
The overall state of the UK economy is important to investors in a number of ways. It impacts the value of pound sterling, which in turn effects importers and exporters. It also gives an indication as to how well stock-market listed companies in different sectors are likely to perform in coming years as well as future interest rates and inflation levels, which also influence investments.
Arguably the most negative element to yesterday’s budget announcement was figures on the UK’s productivity. Prior to the financial crisis, the UK saw national productivity rising by an average of 2% per year. The Office for Budget Responsibility (OBR), the independent forecasting organisation of the UK government, has said that can no longer be expected and for the foreseeable future we can expect that to drop to an average of 1% per annum. Over the ten years since 2007, that change means that by the end of the current parliament, the UK economy will be £49 billion smaller than had previously been expected.
The good news for investors, at least over the shorter term, is that rather than adopting an austerity approach to dealing with the fall in tax revenue that shortfall means, Hammond announced yesterday that government borrowing will be increased in coming years. That cash will be injected into the economy in an attempt to soften the inevitable pain of the Brexit process and keep growth in positive territory. However, many analysts believe that the concessions didn’t go far enough to putting Britain on the ‘war footing’ necessary in the Brexit environment.
Financial markets generally reacted mildly to yesterday’s announcements on the economy and growth prospects, suggesting that little considered to be new was mentioned. If anything, there was a slightly positive reaction. While the pound initially dropped on the budget announcement it bounced back to finish the day 0.31% up against the dollar. Bond markets also saw a mild uplift with the yield on benchmark 10-year guilts reaching 1.289.
The FTSE 100, which often drops when sterling rises because of the international character of many of the companies it is made up of, rose 0.29% yesterday, though it was also boosted by some strong earnings results posted by constituents such as Standard Chartered. Of more note, the more UK-economy accented FTSE 250 finished the day 0.48% up. On that basis alone, we can surmise that the negative growth outlook provided yesterday has been already partly priced in to stock markets and that they also consider it to be overly negative and are taking it with a pinch of salt.
Overall, stock market investors won’t have learned much during or in the wake of the budget announcement yesterday to change their sentiment or provoke a reassessment of investment portfolios.
The Property Market and Property Investment
Much of the commentary around the budget has focused on its impact on the housing market, with budget allocated to helping the Government achieve its stated target of 300,000 new homes a year being built across the UK as well as the previously mentioned abolition of stamp duty for first time buyers. But what impact, if any, is this likely to have on listed home builders and property market investors?
It wasn’t a great budget for the kind of bigger home builders listed on the stock exchange. Financial support coming out of the £1.5 billion allocated for new homes will largely go to small building companies and a review into delays on the start of construction on sites where planning permission has already been given was announced. This targets big home builders who are suspected of land banking and delaying construction on sites until the land value and that of finished homes increases. Planning reform that would also make construction on land previously closed off for building was also delayed.
Landlords owning investment properties were given a double-edged sword. On the one hand, tax breaks that allow buy-to-let landlords reduce the amount of capital gains tax due when a property is sold for a profit the longer they hold the property are to be frozen from next year. On the other hand it was also announced that new tax breaks would be explored for landlords who offered longer term secure tenancies. The latter, as well as potentially being beneficial for some categories of landlords will also prove to be popular with renters.
Finally, one of the more unexpected announcements that came with the budget was that EIS investors are to see the limit that tax incentives can be claimed on doubled. EIS means that investors in young companies are able to claim back the income tax paid on an initial investment as well as any future loss on the investment being tax deductible, as well as profits being largely sheltered. The tax incentives around EIS mean that up to 70% of an investment can actually be recovered through tax credits in the worst-case scenario, considerably de-risking investments. There has been criticism that EIS has been exploited and used for tax avoidance purposes with many investment vehicles claiming EIS benefits actually very low risk.
It was widely expected that tax breaks around EIS would be reduced but in fact, the investment limit is being raised from £1 million to £2 million. That does come with the caveat that rules will be tightened on the kinds of companies that qualify for EIS with Hammond stating that the Government wanted to focus EIS investment on ‘knowledge intensive’ companies. Nonetheless, it was a piece of unexpected good news for genuine EIS investors.