Savers can breathe a sigh of relief that the chancellor has not targeted them directly. Possible increases in capital gains tax (CGT) have not materialised, nor has the mooted tightening of inheritance tax rules.
The valuable tax breaks on pensions survive another round of doom-mongering. And Isa tax wrappers remain sacrosanct.
But before we take advantage of the tax cuts on bubbly or a pint at the pub, let’s look at the overall package. Offsetting the inaction on CGT and the rest is inaction on tax thresholds, including on income, capital gains and inheritance. So as the post-pandemic economy grows, so will the taxes paid. Inflation compounds the effects.
Rishi Sunak has rightly directed money at the poorer parts of Britain and British society, at supporting the recovery and the public services, notably the NHS.
He can afford to do so because the economy has bounced back from lockdown much faster than expected, with the UK forecast to reach its pre-Covid level of gross domestic product at the end of the year, about 12 months sooner than was predicted even a few months ago.
But Sunak is taking something of a gamble with inflation. Even if the extra spending can be financed by an increased tax take, he is funnelling cash into an economy where prices are already rising, especially for fuel.
At least as important for savers as this week’s Budget is next week’s Bank of England monetary policy committee meeting. Financial traders do not expect an immediate increase in the base rate but do see an increase coming by the first quarter of 2022, climbing from the current 0.25 per cent to 1 per cent for the first time in over a decade.
The outlook is particularly uncertain as nobody has lived through a global pandemic for a century. But the inflation risks are there, with global shortages in everything from microchips to lorry drivers, exacerbated in the UK by Brexit.
In this context, Sunak’s effort to push up wages matters. Raising the national living wage and ending the public sector pay freeze is good news for the lower paid. But it will require careful management to prevent a pay spiral.
Still, savers should not be overly pessimistic. Prices, wages and interest rates are rising due to a stronger economy. It’s a question of cautiously reviewing the household finances rather than taking drastic measures.
The outlook for bonds, including gilts, is poor, apart from inflation-linked paper. But inflation can be good for equities, notably in sectors where companies can push through price increases where needed without hurting sales too much. Consumer staples, for example.
Savers holding cash may hope for some increases in the ultra-low rates of the past decade. As Rob Burgeman, investment manager at wealth manager Brewin Dolphin, says: “The effects of inflation can be damaging and gradually erode the value of your money. With inflation far outpacing the Bank of England’s base interest rate, savers are losing money every day.”
Still, retail investors should not hold their breath for a rapid upswing. High street lenders tend to drag their feet in improving their offers. So does National Savings, with a paltry 0.01 per cent interest rate on its income bonds. Smaller banks, fighting for funds, are a better choice. They are lifting rates, with up to 1.3 per cent on offer last week on one-year deposits.
Meanwhile, mortgage borrowers would be wise to act sooner rather than later. There is no knowing how long cheap fixed-term deals will be available. While financial traders expect a gentle rise in market interest rates, it might not work out that way. After all, the Office for Budget Responsibility’s inflation forecast for 2020 has just doubled to 4 per cent in the space of a few months. Prospects for a further increase are surely greater than for a cut.
Stefan Wagstyl is editor of FT Money
Source: Economy - ft.com
