The Chancellor’s Autumn Statement: Does anyone else need a drink?

Is it just me or am I amongst friends if I say I am getting rather tired of the doom and gloom being constantly reported in the media about the state of the economy?

I have read so much commentary on the Autumn Statement and the subsequent Office of Budget Responsibility’s report, that it almost drives you to pour a stiff drink and wonder how on earth we are going to make it through 2023! 

But that’s exactly what the media, want you to feel. It’s headline grabbing stuff so they can get your attention. Let’s take a different approach and look for the sunshine on this rainy day. Let’s balance the books with a few positives. And it’s 6pm somewhere in the world so you can pour yourself a drink if you want to, not to drown your sorrows, but to toast your savviness at choosing a Capital investment portfolio, all of which target above-inflation returns. Cheers! 

Inflation? There’s nothing to fear.

Let’s start with the big one, inflation. Yes, it is rather high, it’s over 11%, but only over the last 12 months. It would be higher without the energy price cap so that’s a good intervention. If you take a longer-term view, which we always encourage our investors to do, and look at inflation over the past 10 years, it averages a little over 2.5% a year. It is also expected to fall in 2023 and again in 2024 to come back to the 2% level. It could very well be that the average inflation rate for the past decade is around 2% and for the next decade 2%. That’s pretty close to Bank of England’s target. 

Meantime, wages are up 6%^[1] to October, state pensions up 10% from next April, and, for our clients, the long-term returns of our popular CAM40 and CAM60 portfolios are around 5% and 7% a year since inception. 

We have outpaced inflation in every one of our portfolios since the launch of our funds. So, as a long-term investor with Capital, you have little to fear from this inflation spike. 

“Everyone will be paying a little more tax” Jeremy Hunt, Chancellor of the Exchequer. 

He is a ‘sleight of hand’ Chancellor that man. Keeping to the Conservative election pledge not to raise taxes but instead targeting allowances and thresholds, most are frozen until 2028. So, as your future pay rises enter the PAYE system, more tax is taken. 

It’s the classic stealth tax. Sure, we have a £50 billion black hole in the UK finances so this needs to be plugged and this is his method. But will this come to fruition? There is a general election in two years. That’s bound to bring some reversals, some sweeteners, so I wouldn’t hold your breath that this tax take will see the test of time in its current format. 

And if they do, let’s look at how we can turn this into a positive. Dropping the 45% additional rate of tax threshold to £125,570 brings another 250,000 or so taxpayers into the additional rate band. It also means that your tax relief on pension contributions is 45% for such earners. If ever there was a budget to encourage people to save for their retirement it is this one. How can encouraging people to save for their retirement be a bad thing? 

If you can fund your pension and haven’t… get on with it! 

And what of you investors? You will be paying more capital gains tax and dividend income tax from next tax and more the year after. Yes, this may be true, but again let’s look at the numbers. 

First, capital gains tax is 10% or 20% (18% to 28% for property gains), not the 20% to 45% if it were income tax. CGT is still very low. That’s a very good thing, it should encourage investment. 

And as for dividends, if you’re a basic rate taxpayer you pay 7.5% tax on them, not the 20% you would on bank interest or on your salary. And if you hold your investments in your pension, ISA or an Investment Bond, there’s no dividend tax or CGT at all with these tax privileged accounts as a rule. 

Use your Tax Breaks

Again, if there were ever a budget to encourage investors to make use of their ISA and pension allowances, and seek tax privileged investments, it is this one. Encouraging people to save for their future by bringing in potentially avoidable taxation is a great thing indeed, especially as you have your Financial Planner to guide you. 

The budget was perhaps Mr Hunt’s chance to reassure the market that he was the prudent one and the brief era of Trussenomics was over. The markets do seem more assured, UK bonds have started to recover, and we seem to be regaining lost ground. 

The OBR have also had their say in their November report; a couple of headlines are worth mentioning.

• Property prices could fall 9% by 2024. I don’t think that’s a disaster and in fact this could be very useful in helping your children or grandchildren get on the ladder. 
• We are at peak inflation now and this should fall over 2023. Could this lead to interest rates falling again in 2024 and mortgages settling down? Yes, it could.
• Unemployment is at its lowest since 1974. The recession we have entered should be shallow and last around two years. Unemployment could rise from the current 3.5% to 5%. 

That’s still low, in 2008 unemployment peaked at 8.4%.  Now, losing your job is a terrible thing and I am not making light of it here. We advise clients to hold a cash buffer to cover periods where expenses are unexpectedly high, or if income falls away.

We recommend anyone who doesn’t have a decent buffer try to create one. In the pandemic the UK savings rate went up to 25%, if you feel vulnerable to unemployment, saving spare income or curbing some spending to build it would be a good move. Get saving!

When the world seems to move in a direction that creates a sense of financial uncertainty and perhaps anxiety, it is always wise to pause and not panic. There have been 11 recessions since 1948, that’s a recession every 7 years. Periods of decline are totally normal. After every recession we have had a recovery and growth and it shouldn’t be any different this time. 

You are by far the biggest influencer on your own success, not Mr Hunt, not the OBR, not the Bank of England. Remember that. 

You cannot control macro-economic events, so there is no point worrying about them. Concentrate on what you can control. 

You can control your own personal financial bubble; you have the power to make great choices, to have faith in your financial plan and investment portfolio and weather this storm like so many have done before. 

The glass is always half full!

Cheers!

Graham McCulley
Director | Chartered Financial Planner 

^[1] Rate of wage growth is 6% so far this year (ONS.gov.uk Oct 2022)