Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
Now that the timetable has been set for the re-opening of the economy, attention has inevitably shifted to next week’s Budget. All eyes are on the Chancellor and how he intends to pick up the tab that has been chalked up over the past 12 months.
The political and personal drama at the heart of next week’s tax and spend statement is the apparent conflict between the old-fashioned Conservative at number 11 Downing Street and his more populist neighbour at number 10.
The Chancellor believes he has a duty to balance the books after the unavoidable but massive spending demanded by the pandemic. The Prime Minister by contrast is seemingly more in tune with the new Keynesian consensus around the world that in an environment of rock bottom interest rates, spending is not only possible but the right thing to do.
The headlines today focus on what seems to be the most likely tax-raising measure at next week’s Budget - an increase in Britain’s relatively low corporation tax rate. The UK taxes company profits at 19%, making us one of the most competitive regimes among big developed economies.
US President Joe Biden is providing Rishi Sunak with the cover he needs to increase that rate because he has already flagged an increase from 21% to 28% in the US corporate tax rate. That would allow the Chancellor to go to 23% or even a bit higher and still look like a friend of business.
There are two other reasons to focus on company tax. The first is that companies don’t vote, people do. Taxing companies has an impact on individuals because it makes companies less profitable, so less inclined to hire staff or pay dividends to shareholders. But it is at one remove from the individuals themselves so easier to get away with.
The second reason is that a tax on profits implies that there is a profit to be taxed. It is obviously better to be targeting those companies that are making money when you are simultaneously trying to help those that are struggling.
Last week, I said here that I thought a rise in corporation tax was a medium risk. I’d say now that it is almost certain.
But what about the other possible sources of tax revenue? The harder, more personal taxes about which there is continuing speculation ahead of next Wednesday.
It still seems likely that the Chancellor will signal future action on capital gains tax, pensions, or even a property or wealth tax rather than announce any measures next week. The announcement of a Treasury ‘tax day’ on March 23 is a clear indication that a number of consultations relating to future tax policy will be bundled up and announced as one package.
This is a welcome step towards the grown-up conversation that Britain needs to have with itself about the kind of country it wants to be and how we intend to pay for our aspirations. Even in a world of cheap debt, there are no free lunches. It’s fine to want to build back better but doing so requires being honest with the rest of us about who is going to pick up the bill.
Returning to the likely rise in corporation tax, what is the implication for investors? Obviously, an increase in tax, all other things being equal, will result in a reduction in profits. That will have to be factored into company valuations and is on the face of it a negative for the UK stock market.
However, the reality is more nuanced than this. The most important thing, for individual companies and for the market as a whole, is returning the country to sustainable growth. If that can be achieved, then investors will happily accept a small rise in company taxes.
They will be even more relaxed about this if the UK represents, as it should, only a relatively small slice of a diversified portfolio.
Investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.