Foolish Special
[ March 21, 2000 ]
Foolish Budget Special
1. Round-up
2. Big Budget News on CGT
3. ISAs
4. Internet
5. Stamp Duty -- Chancellor Ignores Campaign
6. Tax Treatment of Share Options
7. Pensions
8. Petrol, fags and booze
9. Gambling
Gordon Brown's Budget for 2000 emphasised his famed prudent approach to public finances. As announced on Monday, the Government surplus this year is £12b, the highest for a decade. The Chancellor said he expected to maintain this healthy surplus for the next five years as well, even rising to £16b in 2002. But what does this Wise talk mean for the individual investor?
Well, Government debt repayments are continuing to fall. This year the ratio between debt and GDP will fall to 37.1% from 44% just three years ago. With the Government reporting surpluses there is less need for Gordon to borrow money to meet public spending. Long term Government debts are called gilts. These are the basis of many pension pay-outs and annuities. So the Chancellor will need to issue lower amounts of them whilst these budget surpluses remain.
Thus with fewer gilts being issued, because of their scarcity value demand will increase and they will rise in price. The returns from them should thus be lower. However, Gordon implicitly indicated that interest rates might have to go up. Of course, the Bank of England has responsibility for setting interest rates. However, Gordon said he wanted to maintain the inflation target at 2.5% for the next three years. This is what Eddie George must attempt to meet, and he may have to raise interest rates to do it.
So if you are retired or nearing retirement and want income, then rather than rely on gilts, you should perhaps head towards high-yielding shares to provide this necessary requirement. This drying-up in the flow of gilts also emphasises the Foolish message that investors should stick to equities over the long run. The Chancellor forecast that GDP should grow between 2.75% and 3.25% this year and between 2.25% and 2.74% in 2001 and 2002. This should benefit the corporate performance of companies generally.
However, Gordon himself also showed how unreliable such Wise forecasts about the economy are and how impossible it is to predict economic developments. A year ago the Government forecast that the British economy would grow at 1% to 1.5%. This afternoon the Chancellor said that in fact the economy grew by 2%. That's an error of a third above even his most optimistic forecast! So even someone with a staff of hundreds studying statistics and trends can get forecasts fantastically wrong.
A final reminder when considering investments is that Fools should ultimately concentrate on the fortunes of individual companies and not get too caught up in all this macroeconomic Wise guff. It's worth keeping an eye on the background picture, but beyond that it's not worth it. You should stick to more microeconomic factors, like the performances of individual companies. Speaking of which, perhaps the only immediate budgetary impact must be on housebuilders. Stamp duty will rise to 3% on house purchases above £250,000, dampening demand slightly. -- Christopher Spink (TMF Eagle)
In a shock budget move today, the government revealed that there will be no changes to capital gains tax on general investments apart from business assets. In one of the most dramatic speeches by any chancellor in living memory, and at my age that's one hell of a long time, Mr Brown resisted successfully the politician's compulsive urge to tinker and actually left CGT completely as it was, and has been since 6 April 1998. Yes, incredible as it may appear, this means that for three tax years, until 5 April 2001 at least, there will have been no change to this tax in this area. For a tax to remain substantially unaltered for such an eternity will bring tears of raw emotion to the eyes of many an accountant.
Scraping myself up off the floor upon hearing this news, I should point out that there has been some mitigation of CGT as it applies to business assets and employee share option schemes. As previously indicated by the government, they have accelerated taper relief on gains made from the disposal of business assets, which now reduces after one year, and increases up to four years of holding, when the CGT in effect is reduced to 10% for a 40% taxpayer. This actually runs from the introduction of taper relief on 6 April 1998. It is intended to bring similar treatment into effect for employee share option schemes and they have suggested this wil apply to all such schemes, not merely those hitherto known as "approved" ones for tax purposes.
"Business assets" has a special definition that would not cover normal stock market trades in most cases. However the scope of business assets has been widened by this budget in a number of areas to cover employee shareholdings previously excluded from the definition, and outside shareholdings above 5% of the issued shares, previously 25%. -- Stephen Bland (TMFPyad)
The most Foolish news in today's budget is that the top contribution limit of £7,000 into a stocks and shares maxi ISA will continue for another year. The £3,000 limit for the cash element will also be retained. This is great news for us Fools and I wouldn't bet against it being extended beyond next year as well (the Chancellor could make a lot of friends by announcing an extension every year). -- James Carlisle (TMFJimmyC)
If you remember, Gordon Brown ruffled a few feathers in telecom circles last month, scoring a few political points when he promoted easier and cheaper Internet access. Back then, the Chancellor, keen to ride the current information wave, suggested that the cost connecting of Internet should halve in two years to reflect telephone charges in the States. Not only that, but Gordon Brown even barged into the realm of OFTEL, encouraging quicker deregulation of British Telecommunication's (LSE: BT.A) local loops.
Shareholders of BT breathed a huge sigh of relief this afternoon, when the word "telecom" wasn't mentioned at all during the Budget speech. But for telecom accountants amongst you, tax relief is now available against the costs of acquiring submarine telecommunication cables, to bring these purchases into line with the 3G licenses currently under auction -- all very interesting. And no mention was given either to the £2.7bn currently bid for the five 3G telecom licenses. I dare say this money may have helped to inspire some of Gordon's more generous offerings this afternoon.
In fact, given all the uproar over the Internet created by Gordon Brown in the past, there was surprisingly little said about e-commerce.
A £60m package to provide advice and information to help 1m small firms get online and tax cuts for those filling in tax and VAT returns electronically were all Budget endeavours to promote the Internet. In addition, small businesses buying computers or investing in e-commerce activities will be able to write the whole cost off against tax, and a relaxing of work permit rules to encourage highly sought-after IT workers to the UK was also introduced.
Although Gordon stated "We are determined to lead in e-commerce and the Internet", there wasn't anything radically new revealed to get overly excited about. -- Maynard Paton (TMFMayn)
Stamp Duty on share purchases was conspicuous by its absence from the Chancellor's Budget speech. Frankly, we are surprised by this, and as his speech was 10 minutes shorter than predicted we wonder whether he turned over two pages by mistake and missed it out by accident.
He has ignored a widespread campaign for abolition. Not even the Fool's December letter, and the photograph of David and Bruce wearing their ritual Jester's hats outside the Houses of Parliament, was enough to convince him.
The Fool's verdict is that this omission goes against the "Britain of opportunity" and the "wealth owning democracy" he says he wants. The UK 's higher stamp duty will continue to hinder personal investment and is inconsistent with other incentives to save for retirement. The London Stock Exchange will be less competitive as companies will have an incentive to list in Germany where there is no duty.
Beware, Gordon! You have not heard the last of this argument.
Stamp duty on house purchases goes up by 0.5 per cent to try to dampen down the hot property market in the South East. Interest rates are a blunt instrument to control house prices and the Chancellor hopes that this more focused measure will have the right effect. The new rates are, on residential property costing:
- £250,000 to £500,000 - duty rises to 3%
- over £500,000 - duty rises to 4%
-- Keith Milner (TMFKeith)
Among the many issues the Chancellor avoided in this budget was that of the tax treatment of share options, although the real issue is actually company National Insurance contributions on the gains made by employees granted options on shares that have subsequently risen a lot. His temporary solution to this problem is to kick it into touch by asking the Financial Secretary to consult on a technical solution.
Some purists would regard the issue as more an accounting problem than a tax one. Warren Buffett is on record as saying that the cost of share options to a company should be recorded in the accounts as part of the cost of employing expensive people. The tax angle is just one part of that. National Insurance is anyway an anachronism as it is really just another form of income tax. The idea that you got back what you paid has long since gone. To really resolve this issue the government needs to integrate National Insurance and income tax, but that won't happen in a hurry, especially with this lot. So, in the short term, it looks as if the problem will stay with the companies. -- Rob Davies (TMFEssex)
Other than a little tinkering here and there, there is nothing much to report on pensions. The one thing to mention is that the pensioners' winter fuel payment (paid to households with residents over the age of 60) is increased by £50 to £150. -- James Carlisle (TMFJimmyC)
I don't know why I was asked to cover these: I don't even have a car... Anyway, because of the effects of increases in the oil price, petrol only increases by the automatic inflation rise of 2p per litre. Drinkers got off pretty lightly. The tax on spirits is to be held at last year's level, while the price of a bottle of wine and a pint of beer will rise by a mere 4p and 1p respectively. The bad news is reserved exclusively for smokers, with a 5% rise in tobacco taxes on top of inflation. This translates into 25p on the price of a pack of twenty. 25 gram packs of rolling tobacco and pipe tobacco increase 22p and 13p respectively. A pack of 5 small cigars increases 8p. The extra revenue is to be directed towards the Health Service. -- James Carlisle (TMFJimmyC)
Again, I can't imagine why I've been asked to look at this. HM Customs & Excise will be consulting on reforming general betting duty "to enable the gambling and racing industries to flourish in the Internet age". That doesn't sound very Foolish to me. The focus will be on finding ways to make the bookmakers account for duty based on the location of the punter and for the amount to be determined by the gross profits of the bookmaking business. The idea is to stop all the bookies moving offshore to avoid tax.
For some reason (which escapes me) "duty will be abolished for certain types of slot machines found traditionally in seaside towns". By contrast, the typical slot machines in pubs will increase because of social concerns surrounding their higher payouts these days. Apparently gambling is OK so long as it's only pennies. I suppose that's fair enough. -- James Carlisle (TMFJimmyC)
Let us know your general thoughts on today's Budget on the Fool's Eye View discussion board, or use the boards below for more specific comment on individual issues.
Related Links
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External
• H.M. Treasury -- Budget 2000 Index page
• Stamp Out Stamp Duty campaign
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• ISAs
• Taxes
• Pensions
