While inflation may have declined for the third consecutive month in January, there’s no doubt that the UK faces a long and arduous road back towards economic prosperity.
After all, inflation still stood at 10.1% at the beginning of 2023, while the Bank of England (BoE) has also hiked the base interest rate to 4% in response. This macroeconomic climate is increasing both the cost of living and the cost of borrowing in the UK, and while things appear to be improving, this process is gradual and will not deliver tangible benefits until early 2024.
Because of such factors, households, businesses and investors alike are eagerly awaiting the contents of the spring budget, which will be unveiled on March 15th by Chancellor Jeremy Hunt.
In this article, we’re going to take a closer look at the upcoming budget and its likely provisions, while asking what this will mean for investors.
What Will be in the Spring Budget?
As usual, Chancellor Jeremy Hunt will deliver his budget statement in the House of Commons, with this scheduled to start at around 12.30pm on 15th.
In terms of content, households will be happy that support for energy bills is expected to continue for three months from April. The Chancellor is preparing to cancel a reduction in support that would have caused annual household bills to rise from £2,500 to £3,000, delivering at least some relief for those struggling with the rising cost of living.
However, drivers could face an unwanted hike at the pump, at least according to a November forecast from the Office for Budget Responsibility (OBR). This independent body issues its own economic review and predictions in the wake of every budget, and it suggested that 12.3p a litre would be added to fuel pump prices in the spring.
So, although many lobbyists and motoring groups have implored the government to announce a further freeze on fuel duty, the spring budget is likely to ignore these calls and instead place a premium on fuel as the Russians continue to wage war in Ukraine.
What About Taxation?
Interestingly, the 2022 autumn statement introduced a flurry of tax hikes, and by comparison, the iteration unveiled next week should be relatively sedate and uneventful.
However, this doesn’t mean that previous tax increases will be either softened or reversed, especially with Liz Truss having already attempted this with disastrous results during her fleeting stint as Prime Minister.
Ultimately, any kind of policy reversal in this respect or short-term tax cuts are diametrically opposed to the Chancellor’s publicised strategy, as the evidence suggests that this would fuel a further rise in inflation through 2023. In fact, any tax cuts or reductions at all will either be marginal in nature or rolled out over an extended period of time.
There are slight exceptions to this rule, however, especially from the perspective of capital gains tax (CGT) and dividend allowances. Broadly speaking, these allowances, which set the amount that investors can earn before they’re required to pay tax, are set to be halved in the spring budget as Hunt looks to boost the UK Treasury’s income.
More specifically, the tax-free allowance applied to CGT will be cut from £12,300 and £6,000, while the dividend allowance will also fall from £2,000 to £1,000 in April.
What’s more, the already-reduced capital gains tax allowance will be slashed further in April 2024, to a paltry £3,000 per year. Such measures have been met with criticism among some investor groups, with the UK having already paid a record £13.2 billion collectively in CGT tax in January 2023 (up 24% year-on-year).
These measures represent wealth tax iterations, and could be a precursor for more tax hikes in the 2023 autumn budget. As a result, investors will be more inclined to cash in their gains up to that limit before the current tax year is over, while those of you sitting on significant returns will probably look to do this sooner rather than later.
The Last Word
Investors may also respond to the budget or pre-empt its content by adjusting their portfolio allocation, primarily by targeting assets that are completely free from CGT.
These include ISA accounts and UK government gilts, while Premium Bonds may also emerge as popular and rewarding asset classes as 2023 progresses.
This range of asset classes doesn’t include stocks and equities, which are subject to CGT in the existing marketplace. So, although it’s easy enough to learn how to buy shares and target equities, this won’t necessarily deliver optimal returns in the wake of the spring budget.
Remember, the budget will also hike corporation tax from 19% to a whopping 25%, at a time when businesses are already suffering from the continued fallout from the pandemic and struggling to cope with increased borrowing costs.
This measure could therefore affect a number of businesses and marketplace, causing their share values to fall in line with earnings and long-term demand.