Invest-ability Daily 28/10/21: The Confetti Budget

The Chancellor is spending big, and shareholders will be footing the bill

It seems that Rishi Sunak has discovered Labour’s Magic Money Tree – it was next door to Talk Radio host Mike Graham’s concrete plantation all along. Rather than the huge departmental budget cuts many expected, the Chancellor chucked money around at yesterday’s Autumn Budget like it was confetti. As money is also sometimes made of paper, I suppose you could argue – at least, Mike Graham could – that it does indeed grow on trees.

Of course, finding money growing on trees is about as likely as stumbling across a field of freshly planted concrete whilst hiking through the Suffolk countryside – someone has to pay for the largesse, and that would be the taxpayer, who will have to shoulder a further £16.7bn net tax rise on top of the £31.5bn announced in the March budget. According to the Office of Budget Responsibility (OBR), the tax burden as a percentage of GDP will hit 36.2% by 2026-27, the highest level since the 1950s – across the last two budgets, taxes have been raised by more in 2021 than in any single year since the 1993 budgets that came after Black Wednesday. Meanwhile public spending will rise to account for 41.6% of GDP, the largest share since the 1970s driven by huge increases in healthcare spending. You’d be forgiven for thinking that this isn’t a Conservative government at all.

Looking on the bright side, there was no mention of a feared shakeup of the capital gains tax regime, or any further reductions to the pension lifetime allowance. And, from my own selfish perspective, the package of measures including business rates relief and a cut in alcohol duty to help the crippled hospitality industry will at least mean I have somewhere to drink in the future, and that I won’t need to take out a second mortgage to do so. And speaking of second mortgages, those with second homes escaped further pain in this particular tax grab – there was a conservative lurking behind the dispatch box after all. Bank shareholders had a little something to celebrate too, in the form of a 5% cut in the extra corporation tax they have to pay – seems like they too have mystical support from a fairy go(l)d(mansachs)father.

It also has to be said that the Chancellor’s spending spree has come on the back of a stronger than expected recovery from the pandemic, and in turn a higher tax take and lower forecast borrowing. Unemployment is forecast to be lower, and the worst off in society have been looked after through increases in the minimum wage and some changes to the Universal Credit taper.

Nevertheless, as the OBR puts it, “Uncertainty around this judgement [on the economic recovery] remains large.” And tax rises could prove a huge drag, especially on the ability of the private sector to invest in growth, either via capital investment or improving the skills of their workforces – which is where economic growth comes from. Some had expected the better-than-expected public finances to mean the planned 6% increase in corporation tax to 25% from April 2023 would be watered down or delayed. No such luck, and with dividends paid out of post-tax earnings – and subject to an extra 1.25% tax from April next year – it will be shareholders, many of whom are middle income earners simply trying to accrue a decent pension, who bear the brunt of that.

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