Budget delivers tax cuts - J.P. Morgan Asset Management

Budget delivers tax cuts

Contributors Michael Bell, Global Markets Insights Strategy Team

The Chancellor pointed out at the beginning of this budget that a new budget could be required in the spring if a Brexit deal is not reached. On the assumption that a deal is reached, from April 2019 income tax will only be paid on earnings over £12,500 and the 40% higher tax rate will only apply to earnings over £50,000. This amounts to a not-insignificant tax cut. These tax changes, combined with wages rising at the fastest pace since 2009, along with the potential for inflation to fall if a Brexit deal leads to a rally in the pound, mean UK consumers could have reason to feel a bit better off by Easter.

The real question was whether the Chancellor would have to reduce spending elsewhere or raise taxes to accommodate the extra £20 billion for the NHS and higher public sector pay that had already been announced.

In a tremendous stroke of fortune for the Chancellor, the UK fiscal watchdog—the Office for Budget Responsibility (OBR)—revised up its forecast for tax receipts, despite only a modest improvement to its economic projections (see Exhibit 1). This served to fund the spending commitments for the NHS, while allowing for tax cuts, rather than hikes.

Public sector borrowing is projected to decline, from 1.2% today to 0.8% of GDP at the end of the forecast horizon. As a result, public sector debt to GDP is forecast to fall from 85% in 2017 to 74% in 2023.

The Chancellor reiterated the potential for a “Brexit dividend” if a deal gets done. He argued that an economic rebound will further boost tax receipts and free up more funds to spend.

We still expect a Brexit deal to be concluded by year end, because the absence of a deal could derail the fragile recovery on both sides of the channel. A look at recent German business surveys is sufficient to see that business confidence is being affected on the continent, as well as in the UK. While many members of the Conservative Party will not like the deal, we don’t see that they have much option but to support it. The alternative would result in political deadlock that could only be resolved by either another referendum or a general election. Given these limited choices, we expect enough of those politicians who would prefer a hard Brexit to choose to support a softer deal, even if they view it as just the lesser evil.

Overall, this suggests the Bank of England could feel the need to raise rates more than once next year, unless economic growth in the rest of the world proves a drag on UK consumers, whose real after-tax incomes should be rising.


Source: Office for Budget Responsibility: Economic and fiscal outlook, J.P. Morgan Asset Management. y/y is year on year. Oct-18 data for 2017 GDP growth and 2017-18 public sector net debt/ borrowing are confirmed figures. Remaining data are forecasts from OBR. Data as of 29 October 2018.



Related Solutions

J.P. Morgan Global Liquidity
Today’s complexities require a dedicated liquidity partner committed to helping clients succeed through all market cycles.
Performance & Yields
J.P. Morgan delivers comprehensive solutions based on the unique investment objectives of your organization.
Liquidity Insights
View original research, reports and commentary from our portfolio managers, analysts, economists, and traders.

Important information

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from J.P. Morgan Asset Management or any of its subsidiaries to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical and for illustration purposes only. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own professional advisers, if any investment mentioned herein is believed to be suitable to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields is not a reliable indicator of current and future results.

J.P. Morgan Asset Management is the brand for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. This communication is issued in the United Kingdom by JPMorgan Asset Management (UK) Limited, which is authorized and regulated by the Financial Conduct Authority, Registered in England No. 01161446. Registered address: 25 Bank Street, Canary Wharf, London E14 5JP.