Review of Budget 2010: Implications for Financial & Professional Services Sector
The Chancellor’s approach to the financial services sector is neatly summed up by one sentence from his Budget statement this afternoon: “We will not go back to the interventionism of the past. But nor can we return to the hands-off approach of the free-marketeers”. Although refusing to hint at a significant move away from New Labourism, the Budget statement was an attempt (by no means the first) to put clear blue water between Labour and the Conservatives with the election only six weeks away.
This sentence also encapsulates what is fast becoming the key battleground in this election: demonstrating competence. Time and again, the Chancellor emphasised that the Government had been right to intervene “to rescue the financial system”. Implicit in this is a suggestion that had the financial crisis occurred under a Conservative government, things would now be far worse. This will not be the last time we hear this from Labour spokespeople between now and 6 May.
International regulation.
The Chancellor stressed the need for reform of the international regulatory system. He said that “the G20 countries must put in place new rules on capital and liquidity by the end of the year”. He continued, “we also need to reform remuneration practices, improve cross-border resolution for when banks fail, and ensure international standards are implemented...This must be brought forward quickly, as I will urge international Finance Ministers in Washington next month”.
Bank lending
The Chancellor sounded bullish on bank lending, stating that “I have agreed that RBS and Lloyds will provide a total of £94bn of new business loans – nearly half to SMEs” The impact of this is difficult to gauge at this point however.
Vince Cable was publicly sceptical this morning, arguing, “This would be completely letting the banks off the hook. It’s perfectly possible for banks to achieve a gross lending target while withdrawing capital from small to medium-sized businesses”.
Budget 2010 also announced the creation of a new service to fast-track credit complaints from SMEs. This new ‘credit adjudicator service’ will examine lending decisions and will have legal powers to enforce its judgements, if it believes that credit has been wrongly denied.
Green Investment Bank
A new green investment bank was unveiled which will aim to stimulate billions of pounds of private finance for low-carbon industries such as offshore wind farms. The new bank will control £2bn in assets, half of which will be raised from the sale of assets including the Channel Tunnel rail link, while the other half will come from private investment.
Competition in the banking sector
To ensure competition in the banking sector, the Financial Services Authority will improve and speed up the licensing process for new banks.
Capital Gains Tax
Budget 2010 doubled entrepreneurs’ relief for Capital Gains Tax. As things stand, the first million pounds of lifetime gains are taxed at a lower rate of 10%, rather than the main rate of 18%. This threshold will now increase to £2m.
The Chancellor also confirmed that the main rate of Capital Gains Tax would not increase.
Pensions
For the pensions industry, as always, the devil may lie in the detail. On the surface however, there was welcome news with the announcement by the Debt Management Office that they will increase the proportion of long-dated government bonds issued from 36% to 45%.
The announcement was swiftly followed by one from HMRC detailing further amendments for trivial commutation of small pension pots. Part of these reforms will include the opportunity for couples to pool their pension pots together to gain better value on joint life annuities.
The Chancellor also made two potentially key announcements on pension reform, though there were no firm commitments on either. Firstly, that he would “implement reforms to ensure public pensions are affordable” and secondly that he would “look at options” to either scrap the Default Retirement Age, raise it or give employees “stronger rights” on the issue.
For older people still in employment there was also good news as it was announced that the minimum number of hours needed to qualify for working tax credits for the over 60s will be reduced. High earners were not so lucky though. Despite speculation, the Chancellor confirmed that he would maintain the threshold for tax-relief on pension contributions at the £150,000 level announced in the pre-Budget report. In reality, with employer pension contributions included this will likely mean a threshold of £130,000.
Financial inclusion
As expected, the Chancellor highlighted the fact that since 2003, the number of people without a bank account has been halved. He then announced a “guarantee that everyone can have a basic bank account” meaning access for up to a million more people over the next five years.
ISAs
From next month, the annual ISA limit will rise from £7,200 to £10,200, of which half can be saved in cash. ISA limits will also increase annually in line with inflation.
National insurance
The Chancellor confirmed the planned 1% increase in national insurance contribution (NICs) rates from April 2011. He also stressed that “the one penny increase in the main rate of National Insurance Contributions will not affect anyone earning under £20,000 a year”.
He made no further announcements on VAT, income tax, or NICs.
Government support for businesses
A new national investment corporation, ‘UK Finance For Growth’, will be established and will streamline Government funding streams for SMEs. This will also include a new Growth Capital Fund, which will have a specific role in providing fast-growing companies with private capital.
Commercial banks have so far agreed to contribute over half of the £200m committed to this fund.
Business rates
The Government has decided to fund a temporary increase in the level of small business rate relief, so that eligible small businesses occupying properties with rateable values up to £6,000 will pay no business rates for one year from October.
Prompt payment
The Chancellor stated that the Government was taking steps to speed up payments to businesses from government departments, so that up to 80% of invoices will be paid within five days.
Cost efficiencies
Each Government department this afternoon provided details of how they will together to make £11bn of new savings, without damaging front-line services. It is worth reflecting on why these details have not been published at the same time as the Budget itself – as they easily could have been.
The truth, probably, is that the Government did not want these departmental reports to be the focus of this afternoon’s and tomorrow morning’s Budget coverage. It also highlights one slightly awkward issue for the Government: it has not held a Comprehensive Spending Review alongside Budget 2010. We are due a Spending Review, and the fact that we have not been given one presumably reflects the Government’s nervousness about its political consequences just six weeks before the election.
What it does do though is make the departmental cost savings that are dribbling out this afternoon frustratingly incomplete – savings are being announced without overall any reference to overall spending figures.
Our other 2010 Budget reviews
