After a couple of nail-chewing weeks, the UK finally has a new government. It may not be quite what markets would have wished for - equally it is not as bad as they might have feared. But this is unchartered territory with the UK coping with an economic crisis and a political set-up not seen for a generation. Do investors need to prepare themselves for a bumpy ride? Or are the new government’s policies likely to bring stability? First, it must be said that some measure of certainty is welcome. Markets hate uncertainty and the mere fact that a government has been formed has allowed them to concentrate on other areas (like the crisis in the Eurozone). The pound has seen a small rally against the Euro since the election, though this may be more a function of the potential weakness across Continental Europe than a vote of confidence in the new government. More certainty of government is good for gilts, as is the fact that all the major rating agencies said that the outcome of the election had not changed their view on the outlook for the UK. That said, many other problems remain: Over-supply continues to be an issue and the rating agencies may not look so favourably if credible steps are not taking relatively quickly to deal with the deficit. All eyes will be on the new budget on 22nd June. Coalition is not a disaster. Markets had expected a hung parliament and the current compromise is probably as good as they could have hoped for. The true extent of the compromise is unlikely to be seen until the first budget. Watch this space.
What does it mean?
What does our new coalition Government mean for your financial plans? The UK economy is running an unprecedented deficit so we can be sure that somewhere, one or two taxes will rise. In the spirit of compromise, there will be no imminent rise in the Inheritance Tax threshold and the priority is instead a rise personal income tax allowances. Alongside, however, the Prime Minister has given indications that there maybe changes to Capital Gains Tax coming. Rumour also has it there will be rises in VAT. Until we see the Budget Statement on the 22 June, we will not know anything for sure. However, now may be a good time to start a review of your own plans so you are ready to make a change should that be required.
