WeeklyWatch – Commentators address potential impact of UK budget announcement

5^th March 2024

Stock Take

Predicting the impact of the UK budget

Japanese and US stocks finished February on a high note, leaving the rest of Europe waiting apprehensively last week.

This resonated particularly strongly within the UK, where the government is expected to announce its budget on Wednesday. As the general election draws closer, the Conservative Party are showing very negative results in the current polls. It’s widely assumed that Jeremy Hunt, Chancellor of the Exchequer, will be making some headline tax cuts in a bid to secure more support for the party. At the time of publication, there is a collective prediction that there will be a cut to Income Tax of between 1% and 2%. This follows the recent difficult economic growth for the UK economy, and it’s probable that Jeremy Hunt will be limited in what he can promise. Nevertheless, no one can know for certain until the budget is revealed.

Tax cuts could lead to an increase in spending and consequently an increase in inflation. The Bank of England are already aware that inflation will likely rise in the second half of the year regardless of any changes made in light of the budget announcement, suggesting that interest rate cuts will be limited in the short term.

Senior European Economist and Strategist at Schroders Azad Zangana stated:

“The first cut in the UK interest rates is forecast for May (0.25%), followed by another in June. However, due to the expectation that inflation will then rise, interest rates are then only lowered by another 0.50% over the rest of the forecast, ending the forecast at 4.25%. The general election is highly likely to result in a change in government. The left-wing Labour Party has a strong lead in popular opinion polls, which tend to prefer a more interventionist set of policies, with higher taxes and higher public spending. However, Labour’s leadership have not made many pre-election pledges yet, and those that were made have recently been abandoned, owing to costs.”

Europe endures more difficult inflation numbers

The FTSE finished the week down 0.3%, a slight fall from the previous week.

Consumer Price Index inflation fell to 2.6% in February across the eurozone. Despite the decrease from the 2.8% that was recorded in January, it managed to remain above the generally predicted rate of 2.5%. Its decline is mostly linked to lower food price inflation. However, inflation that relates to services unfortunately remains determinedly high.

This news came at a good time for the European Central Bank, who are due to convene and discuss interest rates in the next week. Many commentators had April in mind as being the month where cuts would be made, but a re-evaluation of this has pushed their estimations back until June at the earliest.

Due to inflation figures only being released on Friday, they didn’t have enough time to significantly affect the markets last week, and the MSCI Europe ex UK Index finished up 0.5%.

Continued market joy for Japan and the US

Elsewhere around the globe, the US and Japan continued to shine bright in the markets. Japanese equities had another strong week, as they continued to come together against the relentless weakness in the yen and a highly supportive monetary policy backdrop. The Nikkei 225 had an increase of 2.1% and in local currency terms, this took the total advance of the year so far above 19.0% – a remarkable result in light of huge gains made in the previous year. This resistance has helped elevate the Nikkei Index above the 40,000 threshold for the first time in its history and, at the end of last month, saw it returning to levels last seen in 1989.

Equities in the US also continued their upward trajectory with the S&P 500 and NASDAQ rising 1.0% and 1.7% respectively, in US dollar terms. Across various underlying equity sectors, more gains were noticed but growth stocks once again paved the way.

Inflation data released last week aided the US market. The Federal Reserve frequently addresses ‘personal consumption expenditures’ (PCE) inflation as a key factor in its interest rate decision-making processes. In the previous week, it was shown that inflation measured in this manner fell to 2.4% in January, from 2.6% in December. These numbers fell in line with predictions, and as a result, investors responded to the old notion of ‘no news is good news’; this, in turn, helped boost more market growth.

Wealth Check

For new business owners, tax planning may feel like a low priority as the focus rightly remains on procuring sales and getting operations going. But it doesn’t matter if you’re part of a small start-up business or a much larger organisation, optimising your tax position is equally as valuable.

From the moment you launch your business, smart fiscal planning will have a huge impact on your cash flow, help you take full advantage of your tax allowances and avoid any fines for non-compliance. Many assume that tax planning only becomes necessary when you start making a profit. However, if you experience a loss in the first or second year, this kind of planning can assist you to offset the deficits against other taxable income.

Chartered Financial Planner at Technical Connection – a subsidiary of St James’s Place – Simon Martin says that one incentive to plan from day one is that most tax allowances work on a ‘use it or lose it’ annual basis, so if you don’t use an allowance one year, you can’t use it the next. You don’t want to miss a year or more of planning opportunities because you didn’t get round to it.

He goes on to say:

“Money is often tighter in a start-up, so using allowances or exemptions can make a critical difference to your cash flow. It’s also critical to ensure you’re taking income from your company in the most efficient way. Every pound you save in tax can potentially be used for income or to reinvest in your business.”

He advises that tax planning is crucial to understanding how your business and personal goals fit together – for example, many start-up owners plan to sell their business in the future. But what if that doesn’t work out or the sale price isn’t what you hoped for?

Finally, he adds:

“It’s important to also start moving money into your own name by paying yourself properly and making pension contributions. Financial planning can help you reduce your level of risk by diversifying away from your business and therefore help protect your retirement goals.”

The earlier you start prioritising tax planning, the better it will be. Early savings make a dramatic difference to the final sum that will be available for retirement due to the cumulative effect of long-term investment returns.

If you’re ever unsure about tax planning or need personalised advice that is tailored to your business, speak to your financial adviser for support in tax matters and future-proofing your finances.

The value of an investment with St James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. It is possible that you may get back less than the amount invested.

Levels of taxation, and reliefs from taxation, can change at variable times. The value of any tax relief depends on individual circumstances.

The Last Word

“This will be a prudent and responsible budget for long-term growth, tackling inflation, more investment, more jobs and that path to lower taxation as and when we can afford that.”

– Jeremy Hunt, Chancellor of the Exchequer, as he explains what we can expect in his upcoming budget.

Schroders are a fund manager for St. James’s Place.

The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

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SJP approved: 04/03/2024