24 February 2021
- “Accidental savers” - While the pandemic has created a lot of economic difficulty and hardship for many, a significant minority are better off. This consists of employees and retired people. An LCP report is due out this week delving further into this based on a survey of 10,000 individuals.
- The Bank of England thinks the amount of savings accumulated by households last year was £120bn. Normally you’d expect 5% to be spent. If a higher percentage was spent of such a large sum, that would be positive for the economy.
- What do people do with it? Some are in cash accounts, some are paying down debt. There is not a lot translating into longer term saving. A policy can be set to incentivise either spending to boost the economy or savings to boost people's long term position.
- Is the chancellor thinking about this group? It's such a large sum of money that you have to look at it! Most Bank of England scenarios are based on a fairly minimal release of these savings. Eat out to help out was aimed at this sort of thing. Might be a hint in the budget for a stimulus to spend.
- Tension between the individual strategy (where saving might be optimal) and the collective strategy where spending supports the economy.
- Is policy likely to be top-down tax based or bottom-up sector specific?
- Sector specific policy is likely, or specific to size to support the independent sector. Support such as business rates reliefs is likely to be continued given the cashflow issues many business will continue to face through the summer.
Pensions and the budget
- The Conservative manifesto pledged not to raise the biggest 3 taxes (income tax, national insurance and VAT) so they are bound to look at tax breaks like income tax relief. They are obligated to be looking closely at this, but it could be too soon – there is talk of an autumn budget.
- Over the coming months, some are looking at this to be expected. The question is do you use as a cash cow, extracting amounts every so often, or can the system be reviewed from a blank sheet of paper? Eg flat rate relief, different rules for DB/DC.
- There was a plan to have a budget that was “this year’s stuff” and an autumn statement that was more of a longer term thing. Pensions tax relief is so fundamental and needs a proper look at it.
- One issue could relate to the lower-paid in DC schemes and how tax works. Tax relief on DC pensions today is connected to your tax band. There are a million plus people who contribute to pension schemes but don’t earn enough to pay income tax.
- One way to resolve this would be to move everyone over to a “relief at source” which would be an opportunity for a bigger review of the system as it separates the pension top-up from your tax position. You could use pension top-up to allow lower-earners to get more pension top-up, and less relief for higher earners.
- So watch out for an announcement for moving DC pension to a “relief at source” taxation which could be a precursor for a bigger move.
- How would that sit with the Lifetime ISA? We need to see it in the round. Lifetimes ISAs are a funny hybrid – help to buy ISAs exist for house purchase, and workplace pensions exist for pensions. Makes Lifetime ISA a bit of a messy hybrid. Cash – which most lifetime ISAs are - is fine for a house deposit but bad for long term investing.
- Recovering from a pandemic presents a rate opportunity for systemic overhaul. There is still a relatively new government with a majority, they have the political capital to make change.
- Triple lock was pledged in the manifesto so this is unlikely to be ditched. The challenge is if wages bounce back quickly, it will lead to triple-lock related increases above inflation for several years running. A tough call politically.
- Our sensitivity to spending a billion pounds has been so dulled that perhaps it is just ridden out. It could also be averaged over 2 years.
- Pension age – 67 coming in 2028. 68 still timetabled for 2048, but this is very likely to come forward.
How do we pay for the pandemic spending?
- Don’t tax too early on to choke off recovery, but need a medium term plan to raise some revenue.
What might the chancellor look at?
- New things! There is a history of taxing new things like air passenger duty and insurance premiums. The obvious example here is online spending. Something in that space is likely but difficult.
- Taxing complicated things like Capital Gains – CGT regime very favourable vs income tax, so is likely to be looked at.
- Green taxes.
- Freezing allowances/thresholds – this raises money gradually but it doesn’t cause much pushback David Smith in the Sunday Times.
- Would an online tax be realistically announced or would it be a consultation? Consultation could take a long time, must have been looking at for a long time. Reason we haven’t seen anything is its difficult – companies exist as bits and bytes so how do you tax without companies moving to tax havens etc?
- Could we learn from around the world? We could look at some countries with more progressive tax systems. We are a strange outlier in some ways – between Scandinavian model of high tax large welfare state and American model.
- Our World in Data reference on tax revenues lost to tax havens.
- A classic staple is to try and raise a £1bn clamping down on tax avoidance.
- One thing that probably should be looked at is taxing empty London property, as we could see more wealth based taxes.
- Has the increased visibility of Rishi Sunak helped give the public a better idea of the insights of the government because of the regular contact?
- What is strange recently is that a lot of the “small” announcements being made in the last year would have warranted a whole budget in the past.
- What we’ve tended to do is individual initiatives in the energy sector such as renewable subsidies etc. The issue is the biggest emitters are domestic energy companies and taxes on fuel and heating are regressive and affect older people. So compensating through benefits gets messy. It is likely that there will be more subsidies for electric cars etc.
- Subsidies do change behaviour – eg leaded vs unleaded petrol, the switch happened very quickly with the price differential.
- Tipping point in public opinion on carbon taxes. It is surprising how the chancellor has struggled to get increases on petrol duties through – strong political pushback against the increased cost of motoring makes it politically very difficult. Even if the economic rationale is there it can be very hard to get it through because of this.
One thing to take away
- In the budget look out for whole series of things coming down the track. It won’t be eye-catching stuff, but will be raising billions in the coming years – you just need to be observant to spot in the details.
Most underappreciated thing
- The political constraints on what economically rational policies are. The Budget used to be sacrosanct – chancellors could always get stuff through. Now the chancellor is much more restricted, especially on big stuff.
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