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With little economic room to manoeuvre Alistair Darling has announced the latest budget. Dan Coatsworth, Simon Keane, Rachel Robson and Tom Sieber go head to head with the chancellor and see what crumbs of solace investors can take from all this

Alastair Darling’s first Budget as Chancellor was a tedious affair. Economic stability was at the top of the agenda, unfortunately more of an aspiration than reality. The only real point of significance was Darling’s revelation, or rather realisation, that economic growth is going to be slower than originally expected this year and next.

The economy is now officially forecast to grow just 1.75% this year, downgraded from 2.25%; and moving from 2.75% to 2.25% for 2009. These figures clearly state in black and white that the country is in trouble. Not so, according to Darling. ‘The British economy will continue to grow through this year and beyond. As growth in the world economy slows further, growth in the British economy... [will be] faster than Japan, the US and the Euro area.’

That’s alright, then, Mr Chancellor. As long as we beat these regions – particularly the US, which Darling blamed for starting the turbulence in global financial financials – don’t worry about the fact that UK growth is retreating to a trickle.

Economists reckon Darling’s revised growth forecasts are still too high. Eyebrows have also been raised at the country’s borrowing set to hit £43 billion in 2009 compared with the £30 billion originally predicted a year ago, with further hikes in the three years following.

‘No longer “Waiting for Gordo”, it seems we remain “Awaiting Alastair”,’ said Iain Anderson, director of Cicero Consulting, who pointed out that most of the Chancellor’s plans in the Budget won’t actually be implemented this year.

The country will have to wait until 2009 for measures to combat child poverty and green taxes to come into force. Charging for plastic bags will be subject to consultation, and only if retailers don’t bother to introduce their own schemes. An initiative to encourage saving among low-income earners is still two years away. The planned 2p rise in fuel duty has been postponed until October 2008.

Bookmaker William Hill (WMH) is offering odds of 5/2 that Darling won’t be in office when the autumn budget update is made. Cicero’s Anderson believes that his tenure will depend more on global markets than politics.

Darling’s decision to raise taxes on alcohol and cigarettes to help plug the gap in public finances won’t do any favours to consumer spending, which is already in a fragile state. An 80% jump in capital gains tax (CGT) has been confirmed, having already spooked investors in Aim stocks when the proposals were first made last year. This could see further sell downs in companies trading on the junior stock market before the new rules come into force on 6 April, as taper relief is scrapped.

There are some plus points to the Budget, but not enough to lift the sombre mood. Key workers are getting easier access to borrowing on shared property-ownership schemes. Child benefit is rising from £18.80 to £20 per week for a family’s first child and middle income earners see the basic tax rate cut from 22% to 20%. The Individual Savings Account (ISA) allowance is raised from £7,000 to £7,200 and pensioners will see their winter fuel payments pushed up by between £50 and £100.

On the flip side, low earners will have to pay more income tax. There’s no reduction in stamp duty that is currently blocking many first-time buyers. Heavier taxes will be due on high-polluting cars and the tax break on bio fuels will be removed.

What it all means to investors – Shares rough guide

Tax, tax, tax

In the lead up to Budget day, it was speculated that the controversial CGT reforms would be delayed by a year. This didn’t happen and from midnight on 5 April all capital gains will be taxed at 18%, for many Aim investors this is an effective 80% increase.

The new flat rate regime will replace the current system of taper relief. Taper relief means the longer you hold your shares the less tax you pay. So, higher-rate taxpayers start off on 40% and pay less and less tax on any gains the more years they hold the shares.

Taper relief is especially generous for Aim investors whereby if an Aim share is held for two years, the investor gets 75% relief, so a higher-rate taxpayer goes from 40% to 10%. While many Aim investors have already sold out in anticipation of this change, some were waiting for confirmation at the Budget.

Tax breaks on Enterprise Investment Schemes (EIS) are more generous than the extra £200 allowed to be saved in ISAs. At the moment, the maximum income tax relief available is £80,000. From April, that rises to £100,000. That means for a gross investment of £500,000 into an EIS-qualifying company, one only needs to put in £400,000. The tax break works by the government putting in 20% of the gross amount, so in this case it will inject £100,000. Any investment over and above £500,000 will have to be fully funded from your own pocket.

Higher-rate taxpayers holding investment bonds may wish to consider switching into unit trusts following the 18% flat rate CGT. At present, higher-rate taxpayers part with 40% on unit trust gains, from midnight 5 April they will pay 18%. Meanwhile, investment bonds still continue to pay 20% on any gains, that is after the bond itself has paid 20% in corporation tax meaning an overall 40% rate.

Booze to lose

Beer up 4p a pint, cider up 3p a litre, wine up 14p a bottle, spirits up 55p a bottle. Alcohol duties to increase by 2% above inflation for next four years.

Pub goers should prepare themselves for an extra 20p on their pint, when including the rise in alcohol duty. Camra (Campaign for Real Ale) says such an increase will fuel pub closures and force people to drink more at home or on the streets. Good news for the supermarkets, but certainly not for pub operators. Stockbroker Blue Oar believes pubs which are driven by drinks and not food will suffer most. ‘The tenant faces the prospect of having to coax his customers, who can’t smoke, may be worried about their jobs, are watching their house prices fall and are feeling generally miserable and parsimonious, to pay him more and more for the same product for the next half decade and that won’t be easy,’ says Blue Oar analyst Mark Brumby.

Number’s up

Bingo to stay under pressure from high taxes.

Having lobbied the government to remove VAT from bingo charges, the gaming industry not only failed to win its fight but was also greeted with extra tax liabilities through higher amusement machine licence duty. Bingo operators currently pay 15% gaming duty and 17.5% VAT. The Bingo Association warned that the Treasury could actually see less income from bingo as a result of higher taxes because fewer sites would be able survive. In the past 14 months, 43 clubs have shut down. THe shares in listed bingo operator Rank had fallen 14% to 83p in the 24 hours following the Budget.

Re-energised

Utilities to cut energy costs for the poor, plastic bag charges threatened, bio fuel duty relief scrapped, gas guzzlers taxed, energy efficiency boost for homeowners.

Energy suppliers must treble their expenditure on social tarrifs to £150 million. It is a small price to pay to avoid legislation in the wake of utilities making sky-high profits when households are struggling with large energy bills. A windfall tax wouldn’t have been a surprise and its absence from the Budget is certainly noticeable. The social tarrifs will mainly focus on those using pre-payment meters, so they get a fairer deal. The Chancellor reiterated plans to reduce household emissions, helping to lift shares in support service group Eaga (EAGA) by 6% to 189p, as it is involved in advising households on energy efficiency on behalf of the government. Plans to introduce smart meters to companies over the next five years were also announced in the Budget, but failed to lift shares in Bglobal (BGBL:AIM), a specialist in this area. For further analysis on environmental issues, see the green column on page 34.

Roll out the barrel

Oil and gas companies avoid windfall tax, get help on decommissioning costs

After predictions that a heavy windfall tax would be levied on oil and gas companies working in the North Sea – because of vast profits – the measures included in the Budget were something of a damp squib. Tax breaks will be granted on the costs of decommissioning old oil and gas infrastructure.

Travel & strife

Air travel duty changes, airport security tightened, road users face toll charges.

Airlines will face an extra 10% air duty tax to cover anticipated rise in harmful emissions. This is part of plans to replace the current Air Passenger Duty airport departure tax system with a per-flight tax in November 2009. Airlines have not welcomed the news and British Airways (BAY) believes it will not help the environment. Experts say this cost will inevitably be passed onto passengers.

Security measures will see biometric technology introduced at airports. A move towards this technology could benefit biometric specialists including Croma (CMG:AIM).

Unspecified funding will be made available to develop road pricing technology. Companies are being invited to tender for contracts to manage a nationwide scheme, charging motorists to use certain roads. Capita (CPI) has long been seen as a likely participant, given its involvement in the London Congestion Charge scheme. It could face serious competition from Mouchel (MCHL) which is also a specialist in this area.

Homes & loans

Banks promised access to stable and low-cost mortgage funding, construction companies to make new office buildings ‘zero carbon’.

The Chancellor said uncertain financial markets were hurting UK mortgage lenders. He wants investors, lenders, the Treasury, the Bank of England and the Financial Services Authority to work together on finding the right solution to keep mortgage lending ticking over. This will most likely involve a wider choice of long-term fixed rate mortgages.

Construction companies have been told to make all new commercial buildings zero-carbon from 2019. House builders already have a similar goal to meet by 2016. The British Property Federation wants this tough stance on zero carbon properties to be applied to other ‘heavily polluting’ areas of industry.