This will-we, won’t-we budget is causing economic harm

Watching the will-we, won’t-we budget commentary unfold over the past few months has been painful and has caused significant uncertainty across the market. Not to mention that delaying the budget to October following the July election was a misstep, it has resulted in drawn-out public scrutiny of the multitude of possible tax changes on the table. This unnecessary speculation about what might or might not happen has dampened the more positive economic mood that existed around the election. 

Generally, we are all left with the impression that the new Chancellor is struggling to find ways to raise enough tax revenue to plug the hole, one that seems to have grown since they took office. More troubling, having ruled out so many tax-raising ideas, many of the tax initiatives that are being discussed don’t seem to raise any meaningful amount of additional tax revenue. 

All the while, there is little discussion about how to deal with our ballooning debt pile as a country, now more than 100 per cent of GDP. Instead, we hear talk of changing the fiscal rules to enable additional borrowing, something the bond markets may not be convinced by. And, it does not feel like much thought has been devoted to a genuine growth strategy which would enable the size of the overall tax take or base to grow. Bearing in mind that the only way to fund our public services and provide additional investment is to grow the tax paying base, rather than chasing millionaires away to foreign shores or discourage investment. 

All governments are susceptible to lobbying efforts, but the multitude of u-turns across non-domicile tax rules and carried interest for the private equity industry suggest a diminishing number of options remaining for the Treasury for this budget. This on-off approach has left everyone guessing as to what may come next. And, the trouble is that this guessing and uncertainty has caused much unnecessary and self-inflicted economic harm at a time when we least need more instability. 

The debate about capital gains tax (CGT) has reached an almost farcical state. The CGT tax rate is set to move closer to the income tax level, but not 39 per cent, the Treasury have been forced to confirm. Well, maybe it is 38 per cent then? Or 35 per cent? Market sceptics are left wondering whether the strategy is to create so much uncertainty that it encourages those with unrealised gains to crystalise them ahead of the budget, propping up CGT tax receipts in the short term. Similarly, after being pushed, it has also been confirmed that they will not be introducing an exit tax for those escaping the UK, something which had been suggested in the media as an idea put forward by a few thinktanks.  

There is one policy that has not as yet been denied; speculation around the removal of Business Relief (BR) for shares quoted on AIM, which means that qualifying companies would no longer be free from inheritance tax. And whilst there has been no suggestion from any government document that there will be a change, market participants are worried that a change could be on the cards. A change to BR for AIM shares could have significant implications for both AIM and the London capital markets ecosystem longer term with a change potentially causing material outflows from the AIM market and quite possibly a material correction. The volume of concern in the market is notable and the topic won’t die down – suggesting there is no smoke without a fire. Unhelpfully, in concert some are even speculating that the AIM market should be shut down and replaced with one which has more time-limited, tax and regulatory benefits. 

The AIM market has been a huge UK success story, a market unique to our financial ecosystem, raising billions of pounds from both institutional and retail investors for start-up companies that go on to invest and create jobs across the UK. A recent study by Grant Thornton provided compelling evidence about AIM’s contribution to the UK economy, estimated at £68bin 2023. 

Growth businesses, such as those listed on AIM, are the backbone of the economy, and the government needs to encourage, not curtail the conditions for their success. It would be far more helpful if the debate was more centred around crafting a better investment culture in the UK, with the ambition of more flows into our markets including AIM. Speculation of a policy change has already caused substantial damage to the market, and the further harm that any ill-thought-out change could cause, should not be underestimated. And, on the assumption that the Government does not want to upset this growth ecosystem, the Chancellor should confirm sooner rather than later that they have no intention of changing the status of AIM or altering the benefits to investors in that market.