Another guest post from Michael Magnay, of Kleinwort Benson’s Private Wealth Management team who considers some of the likely implications of the new government on the financial markets and entrepreneurs.
The Good: The Election Result
5 days ago, I wrote that the electorate’s response to the election campaign was essentially a defeat for all the major parties. The politicians have turned that around in a very short space of time, such that this morning , most of them are feeling distinctly chirpy. For the Conservatives and Lib Democrats, the proximity to real power to govern the country has been sufficiently intoxicating to enable them both to make the compromises necessary. Thus the Conservatives end their longest period out of office since the nineteenth century, and the Liberals regain a place in government for the first time since 1945 – their MPs are very happy. The faultlines in this coalition are likely, in the long term, to be found in attitudes to Europe – it is not clear though just how firmly allied to the views of the base of his party, Mr Cameron really is on these issues. Even Labour MPs , one suspects are fairly happy – their much derided leader has resigned and very nobly (but deservedly) asserted full personal responsibility for their defeat, leaving none of the challengers for the empty post with anything to apologise for internally. In many ways too, this is likely to prove to be a good election to lose, with the prospect of the new government being forced to make unpopular spending cuts and tax increases – with their two main rivals in a formal coalition, Labour will be able to pin the same criticisms of Opposition onto both simultaneously.
For financial markets, given the electorate’s decision, this is clearly the best outcome, giving the prospect of a stable government with a clear majority in Parliament and a commitment to deal with the very pressing budget deficit issue. For GBP and the gilt markets the political news is positive. For equity markets though, a word of caution may be appropriate – it is clear that a “conventional” economic mindset will be in the Chancellor’s mind, in which sorting out the government’s finances will take a higher priority than delivering economic growth at least for the next couple of years – these will be difficulty times for the UK economy.
In this respect , the UK will be adopting similar economic policies to the rest of Europe – significant fiscal constraint offset by a very easy monetary policy. Interest rates in the UK and Europe are now likely to stay at current very low levels for several years to come, creating problems for conservative, income-needy investors, whilst economic growth is likely to remain sluggish.
The Bad: The European Position
Europe, too has seen its share of history over the weekend. The establishment of what is effectively a bailout fund and the direct intervention of the ECB in government bond markets, if not actually illegal, are clearly in flagrant breach of the spirit of the Maastricht treaty which established European Monetary Union. A new monetary infrastructure for EMU will now start to be developed, although the chances of this becoming enshrined in a formal new Treaty requiring ratification seem unlikely for now. For Germany this will pose considerable political problems – last weekend they were forced to choose between solidarity with their EMU partners and the stability of their currency – their leaders chose solidarity, but the opinion polls in Germany show that a huge majority would have preferred the choice to have gone the other way , and that no bailout money should be made available to countries which cannot afford to service their debts, and those countries pushed out of the club which they were never expected to join for precisely the reasons we have just witnessed.
These are momentous days in European history, but I fear they are not the precursor to a new period of great prosperity; rather, sadly, they are the precursor to a period of falling living standards.
The Ugly: Capital Gains Tax
It appears that capital gains for non-business assets will be increased from the current level of 18% to either 40% or 50%. Under John Major’s last government the rate of CGT was aligned with the top rate of income tax.
We may see a budget on 24th June. Historically tax rises have only taken effect from the start of any given tax year, this may be the exception that proves the rule.
The Mansion Tax has been dropped.
Michael can be contacted by phone at: +44 (0) 1223 454 561
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