With only a few days to go until yet another Budget, tax advisers and dealmakers would normally be inundated with demands to complete transactions before capital gains tax (CGT) changes are introduced. Whilst deal activity in the mid-market has held up remarkably well despite the headwinds created by the war in Ukraine and supply chain shortages, rising inflation and interest rates, and the cost of living crisis, the normal last minute stampede to the exit seems to have reduced to a shuffle this year.
The lack of panic is possibly a result of deals currently taking longer as buyers weigh up the higher costs of financing them but I also wonder whether it is due to a mix of “Budget fatigue”, a growing sense that the UK may no longer be going to hell in a handcart and even a reduction in fear about the future.
For the last five or so years, we have approached Budgets with trepidation as to what would happen to CGT rates. Whilst the CGT regime has become less favourable as a result of a couple of Budget announcements in recent years, the expected punitive CGT changes have often been the dog that didn’t bark. Could the same be true in 2023?
This month, Jeremy Hunt will deliver his Budget against a backdrop of public finances which are not as bad as expected, so the need for further tax rises may have abated. Sadly, that doesn’t mean that I expect the increase in the corporation tax rate to 25% to be reversed, even though the rate has gone up and down like Norwich City over the last two years. Nevertheless I am expecting a Budget with few nasty surprises.
A boring Budget this year will then set us up for a more interesting Budget in 2024 ahead of the next election. It is hard to imagine a government which is performing as badly in the polls as the current incumbents not wanting to pull a few rabbits out of the hat. After all, a few extra pounds in people’s pockets might save a few of its seats next year. That may lead to income tax reductions in addition to the previously announced cut to the basic rate and there may hopefully even be some good news for business at that time. More significantly, the 2024 election will almost certainly be about the economy and little else in a way that no election has been since 2010.
The Labour Party appear now to be well placed to make arguments on the economy. Sir Keir Starmer recently published his “Five Missions for a Better Britain”. The first mission is to secure the highest growth rate in the G7 with a focus on productivity growth. The UK’s failure to improve productivity is well known. Quite simply, without productivity growth, the economy stagnates and the UK becomes poorer absolutely and relative to our international peers. In the last two weeks, I have been to the USA and Germany and the sense that both were becoming richer than us was palpable.
The reasons for our stagnation as a country are not difficult to discern; we have not had policies to support growth and the need for economic growth has felt like an afterthought. The realisation in the Labour Party that the economic pie has to grow in order to deliver other goals is reminiscent of 1997 and gives me great hope that we may have reached a turning point in our long term economic decline as a country. A Conservative Party facing real competition from Labour for the first time in two decades must surely respond with its own plans for boosting long term economic growth and I look forward to a great battle of ideas to halt decline and build national wealth.
The changes in Labour’s approach to the economy also mean that future tax changes should not be feared in quite the same way as in the past. A Labour government focused on economic growth can surely not punish entrepreneurs by increasing capital gains tax rates on business sales or by further hiking corporation tax rates, although I do fear that the relatively favourable treatment of private equity carried interest may be ended. This should allow entrepreneurs to plan based on stability regardless of the outcome of the election and will hopefully mean that we do not have a stampede for the exit in early 2024.
More significantly, I expect both parties to announce greater support for investment in R&D and capital equipment to support economic goals and this will hopefully result in a much more open dialogue with business to help shape the changes needed. I also draw comfort from the fact that Labour has promised to abolish business rates. Business rates are an antiquated tax on the use of property which applies regardless of profitability. We have massively tilted the playing field in favour of the enormous but capital light tech businesses over traditional retailers and other property users in recent years and moving away from taxing inputs into businesses must support economic efficiency.
In summary, I expect a boring Budget this month followed by economic rejuvenation with businesses being more able to focus on investment and growth as political parties compete to offer growth-friendly policies at the next election and beyond.
