Spring Statement: Initial Reaction
This week’s Spring Statement from Chancellor Rishi Sunak saw the government announcing a range of support measures focused on helping working families as well as middle and high-income earners manage the cost-of-living crisis. We outline the key takeaways below, and our analysts offer their insight into what the Spring Statement means for our core business areas.
- The threshold for National Insurance Contributions (NICs) will be raised by £3,000 to £12,570 in July, the same level at which Income Tax is charged.
- Workers earning less than £35,000 a year will pay less National Insurance, while those earning more than £35,000 will pay more. With NICs due to be increase by 1.25% in April, this means 70% of UK workers will have their taxes cut, thanks to the higher threshold.
- In 2024, (General Election year), the basic rate of Income Tax will be reduced from 20% to 19% This 1% reduction should be worth an average of £175 a year to 30 million people.
- A 5p cut in the duty charged on petrol and diesel has been introduced until March 2023. When VAT is taken into account, this should mean a cut of 6p a litre in forecourt fuel prices.
- The Office for Budget Responsibility (OBR) expects UK gross domestic product (GDP) to grow by 3.8% in 2022, and by 1.8% in 2023.
- The OBR expects inflation to average 7.4% this year, before falling back to 4.0% in 2023.
Asset Management Insight
After spending two years fixated on comments offering direction or relief in the wake of the COVID-19 crisis, it was reassuring to see markets give a muted reaction to the Spring Statement. Investor attention has turned almost entirely to central bank policy, leaving the government somewhat toothless by comparison when it comes to having a meaningful impact on markets.
While tax cuts will be welcomed, Rishi Sunak will face criticism over whether more could have been done to counteract the cost-of-living increase, particularly among society’s most vulnerable. The OBR subsequently stated that the tax cuts announced offset only one-sixth of the net tax increases since he became Chancellor two years ago.
The inflation forecast of 7.4% gives an indication of just how much prices are expected to rise this year, but this figure was not unexpected, and the government and the Bank of England have an almost impossible job on their hands to help curb this. Sunak attempted to do his bit by announcing a 5p per litre cut on fuel duty effective immediately, a move worth approximately £2.4bn, which will make a small dent in the price hikes drivers have been experiencing at the pumps.
Even so, a 3.8% GDP growth forecast for 2022 remains higher than pre-COVID levels, and offers some comfort to investors that inflation is not decimating growth as initially had been feared.
Within the Blackfinch Asset Management portfolios, our exposure to UK equities remains closely in line with our strategic asset allocation (our long-term expectations for portfolio positioning). Given the robust GDP forecast from the OBR, we heard nothing that alters our view. By taking a globally diversified approach to investing, our portfolios ensure investors will not be too exposed to any single country across their portfolio.
Business Relief Investments Insight
We didn’t need the Spring Statement to tell us that more investment into renewable energy is needed in the UK. The Russian invasion of Ukraine, and subsequent sanctions imposed on Russia’s oil and gas industry, mean gas looks set to be in short supply for at least the short to medium term. Therefore, the need for the UK to achieve energy self-sufficiency is of paramount importance, particularly as renewable energy is much less exposed to rising gas prices. We expect renewable energy to play a significant role in the UK economy for years to come.
With UK renewable power much more attractive, we expect this will encourage easier planning and the rollout of necessary peripheral energy infrastructure (such as grid reinforcement and capacity). As a reminder, the Blackfinch Adapt IHT Portfolios invest in the proven technology of solar and wind energy, with more than 47 sites nationwide across the UK.
The OBR latest suite of forecasts delivered a timely reminder of the economic challenges the UK faces. But the best way out of any economic problem is with growth and job creation. The Blackfinch Ventures team is investing into and backing, small, high growth companies which we believe will deliver the future growth and job creation so desperately need.
Here in the UK, the small and mid-cap market employs three-fifths of the total UK workforce. Therefore, investing into the Blackfinch Ventures EIS or Blackfinch Spring VCT will help ensure this invaluable market can thrive, by helping to create jobs, growth, as well as generating vital tax revenue for the government. And of course, the generous tax incentives meant that clients will also save some tax themselves. It’s a clear win-win, for clients and the UK economy.
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