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“Some regard private enterprise as if it were a predatory tiger to be shot. Others look upon it as a cow that they can milk. Only a handful see it for what it really is – the strong horse that pulls the whole cart along.” — Winston Churchill
Please bear with me, this turns more positive by the end.
It is difficult to know where to begin, and so perhaps an apology is best. Will Mellor writes our October Newsletter. On reading his first draft I scored through two words “Rachel Thieves”. At the time we were waiting for the Budget and though there were rumours it would bring plenty of pain for both individuals and businesses, I did not want to get embroiled in a tabloid slagging match ahead of the announcement. Indeed, my final words in the postelection July newsletter had been “we have much hope”. Perhaps I was wrong or maybe, just maybe, Sir Keir Starmer and Rachel Reeves have done the proverbial kitchen sink job and have got all the bad news out of the way in the first few months so that the UK can now ‘kick on’. It wouldn’t be the first time a Government has ‘gone hard’ early giving itself plenty of time to win back voter confidence
Margaret Thatcher once said, “The problem with socialism is that you eventually run out of other people’s money.”
Whether this Government is ‘socialist’ remains to be seen, but at the start of their tenure Labour has demonstrated considerably more support for ‘the State’ than for private enterprise. It is almost unfathomable that the train drivers, who were granted a circa 15% pay increase by the now sacked Minister for Transport, are striking again; almost as unfathomable as farmers being asked to pay for the NHS. You’d think with such a penchant for the green agenda, Sir Keir would be more supportive of ‘grow your own’ rather than importing food with all the associated airmiles.
Rachel Reeves and her comrades consistently refer to the ‘£22 billion black hole’ and ‘working people’.
The black hole
There is little doubt that Labour were left a fairly large deficit in Treasury finances (though this has since swelled as handouts were granted). The fundamental difference between Conservative and Labour policy is that Tories seek to fund state services through business growth. It is binary. As an economy grows Government receipts rise, whether through corporate or personal taxes, thus increasing the pot to ‘invest’ in state funded services. Labour argue that they are pro-growth, yet they have opted to tax more heavily as their means to increase overall receipts. There is a fulcrum point where these higher taxes become such a disincentive that they lead to businesses shrinking and unemployment rising (a further burden on the State), so the actual result is lower overall Treasury coffers (despite higher percentage tax rates).
Whatever their flaws, the Tories handed over with inflation back at target, positive GDP growth and Sterling on an upward trajectory. Indeed, UK business was starting to look forward not back. Whether the recent Labour Budget has derailed this economic stability will not be established for some time. We will only be able to say if it has, definitively, as unemployment and GDP figures filter through, but there is no doubt that the weight has shifted on the balancing scales.
There is a fulcrum point where these higher taxes become such a disincentive that they lead to businesses shrinking and unemployment rising.
Working people
This really is the clumsiest of terms. The Budget was supposed to look after ‘working people’. Are farmers not some of the hardest working people? What about small business owners who have seen employment taxes rise? Or the oldest in society who have worked hard all of their lives and have now seen winter fuel payments disappear. Labour has failed to define who these working people actually are, perhaps they are ‘toolmakers’ but as industrial businesses experience considerable further pressures (such as the vast cost of energy, particularly compared to overseas’ competitors which means that the playing fields are far from level) maybe even they won’t avoid the pain. Vauxhall’s closure of their Luton factory and the loss of 1,100 jobs is a very sad example of working people becoming worse off through redundancy.
We don’t want to be too negative on the Budget but we are tasked with the stewardship of your assets, using debt and equity markets as our tools to generate returns and manage risk; hence if we didn’t fight the corner of enterprise, we wouldn’t be doing our job, for you.
Budget positives
We try to be balanced and therefore let’s see what the new Government got right in the Budget:
1. CGT – having promised not to raise income tax, VAT or National Insurance (more on this below), Rachel Reeves needed to increase tax receipts from somewhere. Pre-Budget murmurings of an increase in CGT from 20% to 28% or into line with income tax (at the higher rate) were rife. Yet, Reeves did come up with a very sensible CGT number at 24%. This is not too penal for investors who get to keep their original investment plus 76% of their profit. In essence, the trade-off for holding risk assets remains fair, particularly versus income tax. Furthermore, the increase is not overly prohibitive and therefore the disposal of shares remains an option (the danger being a higher rate would have simply clogged gains leading to a lower overall pool). This is fair all around.
2. Whilst they are huge financial burdens, I commend the Government on their commitment to pay compensation to those who suffered from the infected blood scandal and the Post Office fraud. The WASPI women have not been so fortunate. My plea is that this compensation is paid swiftly to all concerned.
3. Inheritance tax reliefs on AIM shares. Historically, UK based AIM (Alternative Investment Market) companies benefited from a considerable concession, where on death these assets were not deemed part of the estate for inheritance tax purposes (once held for over two years). This was a fantastic initiative as it incentivised those investors who could afford to accept the elevated risks of holding smaller to medium sized UK businesses, thereby helping to increase UK GDP and employment. That said, the effective 40% tax relief was probably too generous and a reset, to in effect 20% relief, is probably a fair trade off for such strategies. The perk isn’t what it was, but there is still benefit. We have been mindful of the fragility of this concession i.e. the potential for a change in tax policy, which is why we have always been prudent when recommending such schemes. They are right for some but not all and this remains the case.
4. A 1p drop in the price of beer! Greeted with the rather pathetic jeers such a policy deserves in the House of Commons.
Let us look a bit deeper into the impact of some of the less positive Budget policies using certain businesses as examples:
National living wage on the hospitality industry (and all businesses)
The national living wage for 21 year olds and over is increasing by 6.7% from £11.44 to £12.21. This is a substantial increase for those on the lower skilled rungs of the employment ladder, which will result in a considerable cost to businesses in the pub and restaurant industry.
On the face of it, the lowest paid receiving a material rise in salary is a good thing (if they continue to be productive). However, the knock on effect is enormous. If the lower paid (waiters and waitresses) receive more, it is only fair that those that carry greater responsibility (chefs and managers) receive an increase too, as they deserve a premium for their additional duties.
We can therefore see that a hike in the minimum wage has a huge impact on business across the whole ‘pay packet’. Who ends up paying for these rises? Either the business, with a further squeeze on margins (when margin pressure has already been suffocated over recent times), or the customer who comes in for their pint of beer (thank goodness it’s a penny cheaper) and fish and chips. This is where we see the impact of wage growth ramping up inflation.
NI (National Insurance) on the retail sector (and all businesses)
The increase in NI by 1.2% (from 13.8% to 15%) per employee and, as importantly, the dropping of the threshold at which it is paid from £9,100 to £5,000, was sleight of hand in the extreme by the Chancellor. Having said she wasn’t going to increase NI or indeed tax on working people, she has hammered business with this additional tax on employment. The impact will be a loss of jobs or the curbing of future wage growth, both of which will have a direct impact on working people not only in terms of the ‘pound in their pocket’ but also because such costs are inflationary for all goods and services.
The businesses which will see the biggest impact of the NI threshold dropping are those with large workforces such as supermarkets and high street retailers who need help rather than hindrance. Another business which will be affected is the Royal Mail which actually has one of the lowest revenue per employee ratios; no wonder the price of a first class stamp has risen from 18p in 1988 when I first started writing home to £1.65 today and the current shareholders are keen to sell (to yet another overseas buyer).
Next has just reported a total wage cost rise of 7.2% with 2.3% owing to the national living wage, 2.9% to NI and 2% to inflation. This is the theory of the Budget playing out in real life, in a real business.
We can therefore see that a hike in the minimum wage has a huge impact on business across the whole ‘pay packet’.
The Government would do well to look after those who live outside a city ring road with as much nurture as those that live within it.
IHT on family farms
Many readers are far more qualified on farmland IHT than me. The numbers don’t work. Land is of course a valuable asset but the key lies in the return generated from that asset. Once investment has been made in infrastructure, the supermarkets have screwed farmers down on price and the farmer has had to account for the unknowns such as inclement weather, cash flow can be very limited. Slapping 20% IHT on the value of the asset with total disregard for income or profit is hugely short sighted. Land can be purchased as a tax loophole, but that is not the farmer’s fault. This ‘broad brush’ approach is unforgivable and urgently needs re-visiting as the consequences are unthinkable; England’s green and pleasant land could be scarred forever. The Government would do well to look after those who live outside a city ring road with as much nurture as those that live within it. To quote George Orwell “some animals are more equal than others” and those in urban areas appear higher up the food chain as this policy does not just affect farmers, but all businesses that seek to benefit the rural economy. You reap what you sow.
Private schools
Private school fee payers will now have to pay a tax on education. A 20% tax increase in school fees is hugely prohibitive. As with a number of the Budget policies, this burden extends far beyond the fee payer. There will be pressures on Headmasters and staff within the sector to seek to deliver the same level of service with less resource as they try to implement cuts to make their schools viable. They will be, in effect, plugging their own ‘black hole’ with pressures on everything from the kitchen to the science lab, the sports field to the music school; challenging times ahead for all. There will be the knock-on effect of far greater demand for state school places where they are already stretched to the extreme.
So, who has come out best (or least worst) from the Budget?
There is a clear victor. Those who work for the state and civil servants, where pay rises are granted, job security is intact (with little to no reform or cost cutting) and many can still work from home which, as you know from previous newsletters, is one of my biggest ‘bug bears’. The work from home hours within the civil service make deeply unpleasant reading, just try contacting the DVLA, getting a passport or asking for some help with your tax return.
In July, as an electorate, we spoke with huge conviction that we wanted change, and we have got it. None of the policies can come as a huge surprise bar, perhaps, the National Insurance conjuring trick. We will live with this Budget, we just hope that the majority of the challenging news is now ‘out’ for both corporate Britain and the individual. It is not uncommon for a Government to make the biggest changes in the first few months of their tenure as then they have four years to win back goodwill before heading into the next election. We will see. Let’s not forget, the UK population has lived through far higher taxes, far higher inflation and far higher interest rates so I have no doubt that once again Great Britain will thrive.
US relations
Across the pond, we witnessed a crushing victory for Donald Trump and his henchman Elon Musk. As the Biden/Harris administration withers away there is plenty of scope for opportunity for the UK. We are strong allies with America and whilst I don’t expect our leaders to sing the Star-Spangled Banner, it would be helpful if they could work with the Republican Party. This relationship has not got off to a good start and I’d urge a little more diplomacy. Hopefully the narrative thus far can be seen as a Christmas family ‘tiff’ rather than anything more material. Let us not forget Mr Trump loves the UK and in particular his Scottish heritage, with huge investment in Scottish Golf and hospitality. And so, all is not lost. I am hopeful that trade deals will be forthcoming, avoiding the punitive tariffs imposed on other jurisdictions (inflation once again being a concern). Work on this should start now, with haste.
We are strong allies with America and whilst I don’t expect our leaders to sing the Star-Spangled Banner, it would be helpful if they could work with the Republican Party.
