Things You May Have Missed This Week

By Padraig O'Hannelly | 16 May 2008

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The tax changes announced on Tuesday may have some unintended consequences for investors.

Something you certainly won't have missed is the increase in personal allowances, announced this week to compensate low-income earners who lost money as a result of the abolition of the 10p tax band.

What some may not have noticed, is that the increase in the allowance will not benefit those who pay tax at the higher rate. That's because the higher rate threshold has been correspondingly reduced, in order to claw back the additional benefit from higher rate tax payers.

Of more interest from an investment point of view, is the fact that this change will be funded from borrowing. To quote the chancellor, "I am able to finance this proposal through borrowing this year ensuring that we do not take money out of the economy at this time". Unless I'm missing something, this is in fact a £2.7bn injection of money into the economy, a fiscal stimulus equal to 0.2% of GDP.

I think it is reasonable to expect this £2.7bn to add to the revenues of retailers and other consumer-dependent businesses.

But in the light of Mervyn King's warnings on the economy during the week, when he predicted that inflation will reach 3.7%, we can also expect this tax change to add to the problem of inflation, and increase the likelihood of interest rate increases.

So it may be the case that what we gain on the swings, we lose on the roundabouts.

Company announcements during the week included some disappointments, too. House builder Barratt Developments (LSE: BDEV) revealed that most metrics were down significantly on the same period last year.

Shares in mortgage provider Bradford & Bingley (LSE: BB) fell 15% following the announcement of a £300m rights issues on Wednesday. This will particularly annoy investors who bought following the company's assurance, just one month ago, that a rights issue would not be needed and the the business was adequately funded. Whether this was deficiency of management, or simply the nature of the business, I'd be very nervous about investing in it.

As with much of the financial sector, B&B's shares have been in steady decline for some time, and are down 70% in the past year.

In the commercial property sector, Land Securities (LSE: LAND) reduced the book value of its property portfolio by 8.8%, but the effect on the share price was minimal as investors seemed to take it in their stride.