There was not much in the Budget that we did not already know, and luckily there was no attempt to abolish the tax deferral opportunities available on investment Insurance Bonds. Suffice to
say that if Gordon Brown is not lucky (his luck has certainly changed in the last few years as we have observed in previous comments on Budget and Autumn Statements), then there will be much pain to come in the future. If the economy does not
expand as Mr Brown expects next year, then the chances are that we will either pay significantly more tax, or there will be a cut in spending on services. Or, as with previous Labour Governments, Labour will attempt to borrow their way out of
trouble thus breaking their own golden rules. This could lead to the classic boom and bust cycle of depreciating Sterling, increased costs of imports, higher inflation and higher interest rates. All of these could lead to a shrinking or
slowing economy, rising unemployment etc. We need to keep an eye on the numbers and revisions of forecasts very carefully for the next 12 months. We are not convinced that Mr Brown will be lucky. The twin themes of significant
deflationary pressure from the Far East combined with an unsustainable welfare benefit system in mainland Europe, and significantly unsustainable consumer debt in the UK and America, could all lead to a significant period of poor global
performance. This will affect the possibility of UK growth, thus blowing a hole in Gordon Brown's forecasts, (significant numbers of independent economists do not agree with Gordon Brown's view of the future). A Sideways Glance Clearly the Government is desperate to retain the current value of housing, which has enabled people to re-finance irresponsible credit
card debt, raise money on questionable buy-to-let property acquisition, and maintain a reasonable feel-good factor. The trickle-down effect of significant property prices when parents and grandparents pass on their estate has also been
beneficial. One of the main reasons that lenders in the UK have not been prepared to tie-in long-term mortgage debt has been as a consequence of the observations made above, i.e., the boom and bust cycle where interest rates and inflation
pendulum within a relatively short space of time. Gordon Brown and the Government have to convince lenders that we have finally returned to the long-term norm of low inflation and low interest rates, and if so a substantial number of
companies may be prepared to lend money long-term in the UK housing market at fixed rates. This in turn will tie people into a stable housing market, and should ensure that the current value of property can be maintained, and then gently built
upon. This is a gamble that may pay off. In a wider context it could significantly help the UK economy, particularly in the domestic arena, to more sensibly match that of the European model which is not nearly so focused on domestic house
prices, debt, inflation, and pendula. The 'Baby Bond' Home Equity Schemes It is interesting to note that Home Equity Schemes can work on fixed rates,
and as they are available to people aged 60 and beyond with a life expectancy of more than
If you would like more information on Home Equity Schemes please do not hesitate to ask us.
Possibly one of the most significant observations from the Budget is the reform of the mortgage market.
A good news surprise! A child trust fund for those babies born from last September. Every qualifying child will receive a government endowment at birth of £250 – or £500 for
those from lower-income families. Parents will be able to contribute further to the fund which will be available to the child at age 18. The sting – the funds are not likely to be available until 2005 although payments to them will be
back-dated. Watch this space for further comment on possible investment performance.
We are increasingly being asked by our clients to consider Home Equity Schemes, and this could be a valuable way of generating
income on an asset which may not decline, and which could provide good security and a relatively high level of income whilst ensuring that the family still inherit.
25 years, there is clearly already a substantial market for long-term fixed rates in any event.
Budget Response 2005
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