This was a difficult Budget and I hope it provides the kind of boost for growth that Britain really needs, both now and for the future. The Chancellor has some good news for British workers and also for our companies and markets. A cut in National Insurance will increase take-home pay for employees and the self-employed and emphasis on back-to-work help is also welcome. Meanwhile the new British Isa and encouragement for pension funds to back Britain better will also bolster UK markets and growth over time.
The British Isa: Of course I welcome the announcement of a British Isa to be launched later this year. I would have liked the allowance to be higher than £5000, but I am delighted with this start. There will be a consultation, and it is vital to ensure that this much-needed boost for UK markets is not derailed by consultation.
Pension funds disclosure of UK holdings: The Chancellor confirmed rumours that he will require pension funds to report how much (or little!) they invest in UK equities. This will show that most of them devote much more of their assets to back other countries and not our own. It is good to see the Government recognises the importance of bringing back domestic institutional investment support for British growth, especially as pension funds receive generous tax reliefs.
Despite some already having voiced opposition to reporting their allocation to British companies, this kind of reporting of domestic and international asset allocations is important information for pension scheme members, so they can see what their money is being used for. Taxpayers and ordinary members would expect their long-term funds to help ensure that the future of the UK economy is better and can benefit from higher investment. Using pension and Isa assets to support British growth, is a logical, rational policy option to choose.
Each year, taxpayers put £70bn a year of tax and national insurance reliefs into people’s pensions. What do taxpayers as a whole receive for that investment? Surely it is not unreasonable for them to expect this money to support British growth, as our pension funds used to, before regulatory decisions drove trustees and managers away from domestic equities.
This move away form UK equity investments has not been helped by the regulator. In the past 15 years or so, regulatory pressure encouraged much greater emphasis on bonds, telling trustees (of DB schemes) to focus more on managing risk, rather than higher returns.
Even though the capital asset pricing model predicts equities should provide better returns over time than bonds. Traditional large equity weightings were slashed. In addition, regulators focused on driving down investment management expenses.
This well-intentioned measure, however, resulted in widespread use of passive funds, which merely replicate global indices. This meant previous high allocations to UK equities have fallen below 4 per cent, with massive selling of UK shares that has contributed to underperformance of UK markets. Strong domestic fund flows used to support British growth and investment, but this base has been lost. It needs to be revived.
Budget overlooks UK pensioners: Boosting domestic pension fund and investment in UK markets can improve British growth, markets and pensions but there was no mention of pensioners in Hunt’s speech.
The Budget understandably focused on improving rewards for workers and boosting the economy. However, the tax burden on pensioners has increased significantly since 2010 and I would have liked to see the personal tax allowance increased, to ensure that those only earning a little or nothing more than a State Pension, are not going to be dragged into the tax net.
The National Insurance cut and more Child Benefit will benefit working age people, but anyone over State Pension Age does not pay National Insurance at all.
But the Budget will help older workers who are below pension age – a group who the Government rightly wants to encourage back into work. There was also more back-to-work support for those who may be less healthy than when they were starting out. The Chancellor, perhaps surprisingly, did not acknowledge the valuable past role of today’s pensioners in building up the country. He could also have mentioned the Government’s higher cost-of-living and Covid payments for pensioners, which were largely tax-free and therefore of more benefit to taxpaying pensioners than others.