The introduction of a twice yearly budget has seemed to take some of the significance out of the event, and coverage on the mainstream media is somewhat reflective of that. However, the Autumn Budget next week comes at a time of significant upheaval in the global economy, with the UK experiencing these issues more than some of our peers. Here we look at the budget, the economic landscape, as well as considering some of the impacts and opportunities in the retail investment market.
Looking back to earlier in 2021, with the optimism surrounding the vaccine rollout, which the UK managed to navigate more successfully, at least initially than other countries, there was talk of the return of a roaring 20s, exactly mirroring the 1920s. The narrative was appealing, the end of the pandemic, heralding a great period of economic success. As Mark Twain said, ‘history doesn’t repeat itself, but it often rhymes’, and it may be that we are moving into a new economic, just like in the 1920s, but that doesn’t mean that the era will be the same as it was previously. Hopefully a period of sustained economic growth will materialise, and there are grounds for optimism, with many forecasts expecting growth to slow in the immediate future, before picking up again. Others however are pointing out that this scenario is not a given, and economies may need to weather the storm successfully to take advantage of more favourable winds.
So what could be some of the features of the new economic era? Well we may see a shift in monetary policy, moving away from a period of ultra-low interest rates, coupled with state intervention in markets via the Quantitative Easing programme. This has been threatened before, but a significant rise in inflation has made the matter more pressing. Economists are split on how big and how long the rise in inflation will last, but there has been a broad shift in opinion towards interest rates rise, possibly even by the end of 2021. Markets have already priced in a rate increase in the near future. But, even if this does happen, will it mean a minor shift to deal with a temporary inflation rise, or a more sustained increase, perhaps back to more historically normal rates? It may, for the moment be a distant risk, but it’s something retail investment providers need to be aware of. Will more assets be diverted in the future to service consumer’s debts, meaning there is less available for investments? Will increased interest rates make Cash ISAs more favourable than they have been previously, if ISA Managers are willing to pass on interest rates to savers? Will providers of Stocks and Shares ISA need to respond by paying interest on uninvested cash, and if so, are the products and systems capable of responding to this quickly?
The impact of a global labour shortage has been well documented, and whilst there has been a focus on HGV drivers in the UK, this is not just affecting a single economy, or a single industry. Brexit has exasperated the issue here and around the world with labour movement curtailed by the pandemic. Although we’re seeing more countries gradually opening up, some of the restrictions on the movement of labour will likely take some time to ease. In the meantime, wages are rising. It’s an uneven rise, and in real terms is being cancelled out for many by rising inflation, meaning many workers aren’t necessarily feeling it, but businesses certainly are. How this plays out will have a big impact on the relative success of the UK over the next couple of years. Will wage rises be passed on to consumers, causing further inflation and an impact on confidence, leading to the dreaded stagflation, or will it increase business investment, leading to a much awaited increase in productivity? At Simplify we’ve certainly seen a lot of interest in how businesses can identify, triage and affect process improvements, it’s been our busiest year yet, for this type of work. We are already seeing some knock on effects in wealth management and change management, and this will inevitably feed itself through to business cases and change agendas in the near future. If this is coupled with an increase in spending on new technologies, and the UK Government is able to encourage business investment, then there is a possibility of significant improvements to productivity, even if it isn’t part of a grand plan to level up set in motion by the Brexit vote in 2016.
So, what is the government hoping to achieve here? As ever, competing priorities make the landscape difficult to assess. We’ve already seen some increases in taxes announced in 2021. The chancellor is at heart, fiscally conservative, and would like to revert back to a period of austerity, reducing welfare payments to achieve this. We are already seeing policy moving in that direction, with the removal of the uplift in universal credit, the end to the furlough scheme, and a suspension of the ‘Triple Lock’ on pensions. The triple lock is likely to be reduced next week, making it even more important to ensure sufficient savings are in place at retirement outside of the state pension.
How much more room does the chancellor have when there is a need to keep the broad 2019 election coalition between the ‘True Blue’ traditional tory seats of the south of England, with the former ‘Red Wall’ seats further north? Political reality may make further cuts unrealistic. Whatever cuts announced are already being talked of as a ‘war chest’ to spend before the next election, which was only cautiously hinted at during the previous governments more transparent period of austerity between 2010-2016. This isn’t to say that this government is going to be a ‘tax and spend’ one, far from it, but if they are going to achieve some of their stated ambition on levelling up the UK economy, whilst protecting many from the worst of the post-pandemic adjustment, then spending is likely to stay higher.
It’s unlikely that the chancellor will do anything significant to taxes this Autumn, the main focus may well be on changes to Capital Gains Tax (CGT) to bring that closer in line with other taxation. Whilst this change will only impact on a limited number of people, it will significantly impact on retail investments.
As well as the increases on dividend taxes already announced, consumers will already be looking at how they ensure their savings and investments are held in the most tax-efficient way. Many that would previously be content to leave a significant amount in cash are likely to see inflation rising faster than consumer interest rates and shift from being content not to lose value, to seeking growth. Couple this with the announcements from the FCA that they will be looking to actively encourage consumers into more suitable investments, and the amount of savings held currently in cash means there is a huge opportunity here for investment providers. ISAs and Pensions are the most obvious for the mass market, but also niche investments products such as Offshore Bonds and VCTs will, and have already become more attractive, especially to High Net Worth individuals. It’s good to see the FCA making a firmer commitment on suitability, and helping consumers become more aware of investment risk, and those providers who are on the front foot with this and can help navigate consumers to more suitable investments should be long term beneficiaries.
When we look at these factors in the context of a wider changes such as a shift to digital, ESG becoming more and more important, inter-generational wealth transfer, these changes are not going to be short term. The opportunities are huge, and for those that are complacent, the threat is equally big as well.
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