Last week was disrupted to a day in UCH under the knife, this week by a train trip to the Isle of Skye and back and next week by the budget.
To make it more disruptive, the Pension PlayPen is planning a Tuesday morning discussion on the future post budget. There are many people arguing for a smorgasbord approach – whether the attack on our pockets will be from a smorgasbord of measures laid out by the Chancellor on Wednesday 26th November.
So the discussion could be a little messy – I always find food on the floor with smorgasbords.
The retail impact
Perhaps we ought to focus on one or two big issues that could take centre stage on the table. Like this one
But I’m sure that there will be plenty of people wanting to argue that the fiscal measures will kill pensions.
Apparently pensions depend on salary sacrifice
We are of course a nation reeling by the impact of inheritance tax being charged on pension pots.
photo of those who had expected an inheritance windfall?
and despite denials, we have seen enough u-turns in this lead up to the budget not to rule Tom right in his personal financial planning over tax free cash!
The wholesale impact (thanks Phoenix for a bit of help!)
Until last week, the gilt market had a tremendous October and November: yields were down 25-30 bps across the curve, outperforming peers. These moves were attributed to more favourable economic data, particularly on inflation and wages, which increased the probability of Bank Rate cuts, as well as “market-friendly” government commentary about the upcoming Budget.
However, the Chancellor’s income tax U-turn saw gilt yields rise 10–15 bps as nervousness grew among investors about the government’s commitment to fiscal discipline, its willingness to make ‘tough choices,’ and the possibility of further political volatility. All taxes hit economic activity, but the effects of changes to income tax are generally predictable. Outsized changes to many other taxes can lead to outsized economic effects, unintended consequences, and ultimately policy U-turns.
The pensions rely on gilts going the right way
Phoenix has identified six points that would constitute a “good Budget” from a gilt investor’s perspective and assess how we believe the Chancellor is faring:
-
Fiscal rules need to be met; headroom restored at £9.9bn or possibly increased. The Chancellor has repeatedly said the fiscal rules are “iron-clad,” so the belief is that headroom will at least be maintained at £9.9bn. However, the refusal to increase income tax suggests that the headroom will not be meaningfully increased.
-
Issuance in the current fiscal year and across the forecast horizon should not rise meaningfully. The Chancellor noted that higher issuance comes with higher costs and that government debt-servicing costs are too high. Given one of her three Budget pillars is reducing debt-to-GDP, we do not expect issuance to rise significantly.
-
The OBR’s reduction in productivity assumptions – and hence GDP growth forecasts -should be seen as credible. All indications are that the OBR is reducing its productivity forecasts, bringing its economic growth predictions more in line with other forecasters.
-
Measures undertaken should not be seen as inflationary. Another of the Chancellor’s Budget pillars is reducing the cost of living. Hence, it would be strange to increase VAT. Indeed, we think the Budget is more likely to lower inflation than raise it, with the possible scrapping of VAT on energy bills.
-
Revenue-raising measures need to be seen as credible and not entirely back-loaded. The Budget will look more credible if most of the gap is filled by tax rises now, rather than delaying tough spending cuts for later. However, by relying on multiple tweaks and novel changes to the tax system instead of income tax rises, this may increase complexity and result in a larger share of the overall tax burden being shifted to businesses.
-
The Budget announcements should boost political stability. Unfortunately a politically popular and gilt-friendly Budget is a circle that is hard to square. Although a manifesto breach is likely to be avoided, the new measures could still leave Chancellor Reeves and PM Starmer vulnerable.
Ultimately, the Chancellor will be hoping her Budget paves the way for faster Bank Rate cuts by the Bank of England next year, creating a more positive story into the second half of the parliament.
Can the wholesale agenda and the retail agenda be satisfied or will we be left with a lot of food on the floor and some very messy looking faces in the Treasury?
