INVESTMENTS

Though he naturally chose not to highlight the fact, the Budget was notable for Clarke having to eat humble pie on taxation of both gilts and employee share options
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The Independent Online
W ell, that's a relief then. It seems that once again we have a Chancellor who, despite all fears and hopes to the contrary, is prepared to put fiscal responsibility ahead of stoking the fires of inflation with an expansionary pre-election Budget. Backbench Tory MPs and excitable City analysts may be disappointed by the lack of fiscal fireworks on Tuesday last week, but there are worse fates for a serious-minded chancellor. Indeed, a drubbing from the 1922 Committee is a campaign medal that any self-respecting occupant of No 11 should be happy to wear with pride.

True, from a career perspective, it hasn't always done chancellors much good in the past to display as much fiscal rectitude as Mr Clarke has done this year. Just look at what happened to Stafford Cripps and Roy Jenkins, who both took a high-minded view of their responsibilities and got pilloried by their own parties as a result. But from the stance of a long term investor, there is much to be admired in Tuesday's cautious performance by Mr Clarke. It will do nothing to damage shares and will also help the prospects for gilts, once the market has come to terms with the Government's extra funding needs.

It is easy to forget that the first duty of a chancellor is to manage the public finances, not to pursue partisan political ends. For a while, when it seemed that Keynesian demand management has made fine-tuning the economy feasible, chancellors spent a lot of time assessing how much demand to put in or take out of the economy. This so-called ''Budget judgement'' was widely seen as the key part of the job.

But with the general discrediting of Keynesian policies, and the growing power and influence of the world's financial markets, which put de facto limits on how far governments can stray from financial orthodoxy, it fortunately no longer represents such a tempting avenue for chancellors to pursue. With the relentless growth in the scale of Government spending, deviations from the path of sound budget making are now much more likely than before to carry high costs in the form of higher than necessary interest rates and a weak or volatile currency. Mr Clarke, thank goodness, has opted not to try to defy the trend.

For all these reasons, last week's cautious Budget is broadly to be welcomed. Since there is no law that says one political party must rule forever, any prudent investor will allow for the possibility of governments changing their political hue from time to time. Whatever your business-chasing broker may tell you, it is hard to believe that most serious investors have not already factored in the prospect of a Labour government into their thinking.

My own view is that a Tory victory at the next election is by no means impossible, even now. It certainly makes a reasonable bet at six to four (the price quoted by Ladbrokes after Tuesday's performance). Interestingly, the bookies reckon that the odds on a Tory victory have narrowed after the Budget. This tends to suggest that the assumption that tax cuts now can alone win the next election is misplaced - though next year's Budget, if there is one for Mr Clarke, may be a different story.

What the Chancellor must be hoping is that economy and consumer confidence has sufficiently revived by next November to make the cuts easier to justify than they are today.

A year from now, we will also be one year further on in adapting to the effects of a low inflation economy, and will also have the benefits of the interest rate cuts that now look increasingly likely, given the clear slowdown in the rate of economic growth.

At the macroeconomic level, the Budget is broadly neutral. The planned pounds 3bn or so of income tax cuts are balanced by an equivalent cut in public spending which may or may not be achieved (experience suggests it pays to be sceptical). Even the Treasury's own projections show that, notwithstanding the cut in basic rate income tax and the real increase in allowances, the proportion of tax and national insurance will still rise marginally over the next three years.

Apart from the general desirability of the steward of the nation's public finances behaving responsibly, the other argument for welcoming Mr Clarke's ''do little'' Budget on the tax front is that his attempts to muck around with taxation earlier this year have proved to be so ham-fisted. Though he naturally chose not to highlight the fact, the Budget was notable for Mr Clarke having to eat humble pie on the taxation of both gilts and employee share options.

The whacky notion of taxing private investors' capital gains on gilts as income, as inequitable as it was ill thought out, has now been dropped completely and the tax rules on share options, introduced in haste as a knee jerk reaction to the Greenbury Committee's report on executive pay, have now been scaled back again so that most employee option holders are no longer unjustly penalised for the excesses of their boardroom colleagues.

It goes to show that while Mr Clarke may have shown good judgement in his overall approach to the Budget, as a would-be tax reformer he is a non-starter. My only serious regret is that he has not moved faster to do something positive about achieving the Government's long term aims of eliminating both capital gains and inheritance tax. Getting rid of capital taxes would do more for the economy, for voters and for saving than any other single taxation measure.

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