News | Wednesday, 19 May 2010

Con-Dem nation

Weekly international investment round up to 18th May 2010

• New UK Coalition government gets to work.

• Big spending cuts and tax shake-up top agenda

Mark Lamb

Gordon Brown’s tenure as UK Prime Minister may have been short lived but he certainly governed through some interesting times. Yesterday, as the British Parliament reconvened Mr. Brown moved to the opposition’s back-benches as the coalition government between the Conservatives and Liberal Democrats moved to the fore.
The new British government inherits borrowing levels at record peacetime highs, unacceptable unemployment levels and a country fresh out of recession. The FTSE 100 remains 9.7% lower than this year’s mid-April peak while on Monday the pound fell to a 13 month low against the US dollar following remarks made by the new Prime Minister, David Cameron, that he has discovered ‘very bad’ spending decisions made by the previous administration. Incoming Chancellor George Osborne has set about restoring investor confidence by calling an emergency budget on the 22nd of June and outlining the need to immediately cut 6 billion pounds from Britain’s bloated deficit by initially targeting ‘non-priority’ areas with politically sensitive sectors such as the health service likely to be spared. While much has been made about the possible failings of the coalition between the ‘Cons’ and the ‘Dems’ it is clearly in their own and their nations interest to make it work. By themselves the Conservatives would not wield enough power to implement the changes they believe are required while a longstanding key belief of the Liberal Democratic party is the need for wide-ranging political reform ultimately leading to politicians of all persuasions having to work together for the benefit of all, failure could therefore lead to the downfall of both parties but no doubt voters and investors will remain skeptical for some time to come.
A radical shake-up of the UK taxation system is likely to be one of the largest visible changes. Unfortunately, the money to repay the huge national debt and in-turn reduce the deficit, which at more than 11% of gross domestic product is the largest of all the G7 nations, has to come from somewhere. VAT could increase from it’s current 17.5% level which may have implications for retailers while Capital Gains Tax (CGT), payable when people sell assets such as shares, a second home or a business for example may well increase from 18% closer to the 50% top rate income tax payable by higher income earners. However, the Liberal Democrats policy of wanting to increase the tax-free personal income allowance to 10,000 GBP is being well received by the new coalition; this would mean that everyone in the UK would be able to receive an income of 10,000 GBP a year without paying any tax, up from the present 6,475 GBP level. Not only could this encourage more people to move off benefits to find work and stop the absurd situation of giving a minimum wage with one hand and taxing a chunk of it on the other but this could actually help increase consumer spending and prevent the danger of the economy grinding to a halt. While history will ultimately judge the ‘Brown years’ arguably, for investors the UK has just got interesting again.

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