Ashish Misra, Head of Investment Strategies in the Wealth Investment Office at Lloyds Bank Private Banking, examines the finer points of the 2015 budget and the implications of the Chancellor’s announcements.
In your view, what was the main focus and intention of this budget?
The Chancellor’s final budget before the election was primarily aimed at continued fiscal consolidation, whilst avoiding the kind of unfunded giveaways which might squander any gains made in previous years. With his focus clearly on the ballot box, the Chancellor’s budget could perhaps best be described as fiscally neutral but politically potent.
Were there any big surprises?
Most of the budget policy initiatives had been flagged well in advance. The biggest surprise, however, was the Help-To-Buy ISA, designed to help first-time buyers saving for their first home. The Government will add a 25% bonus to the amount saved. This would represent a £50 monthly bonus if the maximum monthly amount of £200 is saved. There is a maximum government contribution of £3,000 on £12,000 of savings.
Who do you think will benefit most from the changes?
The key beneficiaries will be low income wage earners, long term savers and first time buyers. The plan to raise the personal allowance to £11,000 by 2017-18 could, according to estimates from the Office for Budget Responsibility, mean that 4million low income workers would not pay income tax. Progressively raising the threshold for the higher rate (40%) tax bracket also delivers a tax cut to roughly 27 million people.
Are there any important changes for investors?
Long term savers have been offered additional withdraw-and-replenish facilities on their ISAs. No tax will be deducted on the first £500 of interest earned from savings for higher rate tax payers (with no tax on the first £1,000 for lower rate tax payers). However, wealthier investors should be aware that the Lifetime Allowance on pension savings will drop from £1.25 million to £1 million from 6 April 2016, although from 2018 this will increase in line with inflation.
Do you think the changes are likely to affect growth?
From a policy perspective this budget was not much of a game changer; the policies announced are unlikely to have a significant impact on growth in and of themselves. However, as the Conservative’s chief election strategist, the Chancellor’s political intent with this budget was to break the current stalemate at the polls, the election result suggests that he was successful in this.
Which sectors will benefit and will any suffer?
In my view, two sectors that will benefit from the budget are real estate and energy. The Help To Buy ISA should increase the numbers of first time buyers, boosting house prices at the lower end of the market. In the energy sector, the £1.3 billion in tax relief for North Sea oil is intended to bolster future production levels and counter the impact of weak global oil prices.
Which, if any, of the changes in your view are most significant in the long term?
The Chancellor has consistently stated that each individual policy reflects the overall long-term economic plan. To that extent, the changes are merely an extension of previously articulated long term objectives: lowering the tax burden on ordinary wage earners; lowering taxes to make UK companies more effective and attract businesses from overseas; reforming the long term savings market; and implementing a mixture of spending cuts and welfare reforms. The ultimate objective is to be fiscally neutral across the economic cycle.
Apart from benefiting low earners, are there wider implications of the rise in Income Tax Personal Allowance?
This change is expected to benefit women significantly more than men, going some way to reducing the gender gap in terms of income.
Is the Chancellor taking any risks with this budget?
The reduction in the Lifetime Allowance from £1.25million to £1million was arguably a risk politically, as it directly hits the elderly wealthy demographic who traditionally form part of the core Conservative vote. However, this doesn’t seem to have been critical at the polls.
Do you think anything has been held back from this budget?
The Chancellor resisted the temptation to indulge in pre-election giveaways which could have undone some of the progress made in controlling the fiscal deficit. At the same time, he postponed some tough decisions – on further cuts to government spending and welfare reform – to the next Parliament.
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