Budget comment 1 - Budget too cautious on climate change

Budget too cautious on climate change, says F&C’s Bakhshi

Today’s widely trailed “green” Budget was too cautious on the environment, according to Vicki Bakhshi, associate director of Governance and Sustainable Investments at F&C.

In his first Budget, the UK Chancellor of the Exchequer, Alistair Darling, announced a range of measures including the introduction of five-year ‘Carbon Budgets’ from 2009; reform of Vehicle Excise Duty; the auctioning of 100% of allowances for large electricity producers in Phase III of the EU Emissions Trading Scheme; a year two increase in the new per plane tax to replace air passenger duty; steps to encourage environmentally-friendly housing and a threat to impose a levy if retailers do not take voluntary action to reduce the use of plastic bags.

Darling also announced a postponement in increases on fuel duty.

“The UK has committed to ambitious targets to reduce greenhouse gases and this will require a significant shift in capital away from traditional high-carbon options towards cleaner alternatives,” explained Bakhshi, “but to-date policy hasn’t been strong enough to achieve the shift at the pace required.

“The Chancellor has obviously had to walk a fine-line between the long-term strategic imperative of tackling climate change and the shorter-term concerns about the weakening global economy. Today’s Budget provides lots of small measures but nothing on a scale that gives us the confidence that the UK will do enough to meet its targets. Investors want to see a strong long-term policy framework in place in order to finance the shift to a low carbon economy.”

However, Bakhshi welcomed the move to link biofuels with the greenhouse emissions achieved through the shifting of support away from the duty differential towards the Renewable Transport Fuel Obligation in future years.

“There has been a genuine concern about the sustainability of the planned expansion of biofuels. The production processes used for some biofuels can cancel out the environmental benefits, and there are other wider sustainability impacts in terms of rising food prices,” said Bakhshi.

She concluded by saying: “We will have to wait until the summer when there is a consultation on how the UK will meet its renewable energy goals. Until this is addressed, the UK will continue to be a laggard among EU peers on environmental policy”.

Little cheer for the private investor

With the possible exception of an increase in the annual Enterprise Investment Scheme allowance to £500,000 per annum, there was little in the Budget to excite the private investor, says F&C’s Jason Hollands.

“Many of the measures in the Budget today had previously been announced and there were no major rabbits pulled out of the Chancellor’s hat,” said Hollands.

For example, as previously announced the ISA allowance will rise to £7,200.

“This is frankly a pretty meagre increase given the allowance has been frozen at £7,000 since inception,” said Hollands, “and still a long way behind the PEP and TESSA allowances it replaced”.

Survey research commissioned by F&C last year suggested the public would like the ISA allowance raised to at least £10,000.

“Additionally, investors will also be allowed to transfer money saved in cash ISAs into stocks and shares ISAs – though I doubt many providers are expecting a rush of activity anytime soon, given the state of markets,” he added.

A further measure in the Budget was the announcement that from April 2009, the requirement for providers to physically receive a CTF voucher from parents before opening an account will become voluntary rather than mandatory.

“This may help to marginally reduce the number of parents who lose the paper voucher as large numbers have done,” said Hollands. “However, there has been no change to the annual £1,200 allowance that can be invested by parents on behalf of their children. The success of scheme over the long-term won’t be the number of vouchers invested but the extent to which parents put their own cash into these plans.”

The most significant measure for the UK financial services industry confirmed in the Budget today is the new Capital Gains Tax regime. From the new tax year this will see the introduction of a flat rate of 18% Capital Gains Tax which will replace the old regime which includes taper relief and indexation allowances.

“This has wide ranging implications,” said Hollands, “including increasing the attractions of collectives over life bonds and making investments which generate their returns in the form of capital considerably more attractive to higher rate tax payers than those which provide interest or dividend distributions.”

F&C cites two of its own investments, F&C BLUE Fund and the B share of Investors Capital Trust, that it believes should garner more interest as a result of the changes.

Alongside the CGT changes the Chancellor also confirmed that he will introduce a lifetime ‘entrepreneurs relief’ allowing employees or directors of trading businesses with a minimum 5 per cent stake in the company to only pay an effective rate of CGT of 10% on their first million pound of gains.

“This is of course the effective rate that all shareholders in AIM and private companies have previously been able to enjoy under taper relief arrangements,” concluded Hollands.

Darling too optimistic on growth

The Chancellor’s forecasts of 1.75 – 2.25% growth are too optimistic according to Ted Scott, manager of the F&C UK Growth & Income Fund.

“While the reported rate of inflation (CPI) is not that high the retail prices index (RPI), which includes many things which the CPI doesn’t, is much higher. Inflation is rising,” says Scott.

“Disposable income has been squeezed at the same time the housing market is slowing down. The cost of servicing mortgages is also going up even though interest rates are going down. Furthermore banks are not prepared to lend so much,” he added.

“I don’t think we are going into a recession this year but depending on what happens in the US there is a good chance we’ll have a recession next year, hopefully it will only be a shallow one. The Chancellor however is saying the economy will slow down a bit and then recover in 2009, I think he is being too optimistic,” he concluded.