In terms of the main giveaways – the top rate of tax has been cut to 45% from 2013, the personal tax allowance has been increased to £9,205 and corporation tax will fall to 24% in April and to 22% in two years time. Changes to tax-free allowances on pensions will also raise money for the chancellor. The measures will be paid for by higher stamp duty of 7% on homes over £2 million and a further clampdown on tax avoidance. The levy on banks will also be increased from next January. Growth forecasts for this year have been revised up very modestly to 0.8% from 0.7% and overall the government is expected to borrow £11 billion less in total over the next five years.
There was little impact on equity markets whilst Gilts rallied on the back of the announcements, partially due to lower-than-expected issuance for the next fiscal year, which the Debt Management Office says will be £168 billion. Index-linked bonds will make up 22% of this. Generally, the government is on track to achieve its goal of eliminating the deficit over the next five years. Their efforts increase the chances of the UK retaining its AAA-rated, safe haven status, but as last year showed, the biggest threat to the economy comes from events well beyond their control, particularly in the eurozone. Should growing optimism about the global economy prove misplaced, then the UK’s weak finances will come under renewed scrutiny from the rating agencies.
Investment Manager at Quilter, Belfast
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