Monthly Archives: August 2018

OBR forecasts present need for tax increases in the Budget
August 2018

The long-term outlook for government finances suggests tax increases are inevitable.

The Office for Budget Responsibility (OBR) produces medium-term financial forecasts alongside the Budget and Spring Statement, but that is not its only task.  It is also required to take a longer-term view of the public finances, producing a Fiscal Sustainability Report every two years.

The latest version of the report was published in mid-July and did not make for comforting reading.  The graph is a good summary of the bad news:

  • The purple lines show the projected government borrowing as a percentage of the size of the UK economy.  In 2017/18 annual borrowing was 1.9% of Gross Domestic Product (GDP). By 2067/68 it becomes 85.6%.
  • The green line shows the total amount of government debt, also as a proportion of the UK economy.  As at May 2018, total borrowing was 85.0% of Gross Domestic Product (GDP). By 2067/68 it becomes 282.8%.

In the report, the OBR says, “Needless to say, in practice policy would need to change long before [2067/68] to prevent this outcome.”  That means reduced expenditure and/or increased taxation.

Reductions in expenditure are unlikely, as much of the rise is driven by the costs of caring for an ageing population.  In the short term, increasing taxes is also hard to imagine given the current political climate.  In the longer term, tax rises appear unavoidable based on the OBR’s calculations.  The first indications of what form tax rises might take could emerge when the Chancellor gives his response to the OBR in the Autumn Budget.

If you are looking for any solace, it is best sought in mathematics: these types of long-term projections are highly sensitive to relatively small changes in the underlying assumptions.  If the UK economy were to grow faster than the 2.2% the OBR has assumed, the situation improves significantly.  Alas, the opposite is also true.

With the UK’s growth rates remaining low, however, it seems likely the government will need to take some kind of action soon.

  • The value of tax reliefs depends on your individual circumstances.
  • Tax laws can change.
  • The Financial Conduct Authority does not regulate tax advice.

 

2018 proves volatile after the smooth sailing of 2017
August 2018

The first six months of 2018 were unpredictable times for investors as global stock markets suffered a sudden bout of volatility.

Source: LSE

The unpredictability came as a major surprise after the general stability of 2017.  Once the dust had settled there was a mixture of good and bad news.

The UK markets were inevitably led by Brexit, with negotiations mainly at the intra- rather than inter-government level.  The other perennial British topic, the weather, produced the Beast from the East, depressing economic activity in the first quarter.

US short term interest rates continued to rise under the new chairperson of the Federal Reserve, with more increases promised for the second half of the year.  Meanwhile, the tension between America and North Korea turned into a denuclearisation agreement and the Trump tax cuts were followed by the start of Trump trade wars, hitting long-term allies as well as the supposed target of China.

For all that, an investor who opened their first newspaper of the year on 1 July 2018 would have thought nothing much had happened.  The FTSE 100 index fell by less than 1% in the first six months of 2018.  Across the Atlantic, the S&P 500 rose in the same period, but only by 1.7%.

The small overall changes are a reminder that daily market movements often turn out to be self-cancelling noise, best ignored by the long-term investor.

  • The value of your investment can go down as well as up and you may not get back the full amount you invested.
  • Past performance is not a reliable indicator of future performance.
  • Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.