Updated: Dec 18, 2019
A large part of the discussion surrounding Brexit has been regarding money and taxes. Find out how your finances will be impacted in this article. It is the second of a three part series on The Brexit Vote.
Britain is finally heading for a general election after numerous failed votes and weeks of political posturing. One area that Brexit may well impact is in spending and tax policy. To make a success of Brexit, and deliver the change people voted for, the Conservative party say they are making the right choices for our economy. They say that unlike under Labour where we would have to “pay through higher taxes on everyone…,” the Conservatives are increasing wages, have a new housing policy to put into place and are ending low pay in work.
Average weekly earnings have gone up by 4% compared to last year and a record number of people are currently in full-time jobs - that’s 24.17 million people, or 74% of the total workforce. Unemployment is down by almost half of what it was in 2010. Conservative say it is ‘thanks to the tough decision we have made,’ that we can now afford to invest in the country’s priorities. These include hiring 20,000 extra police officers, increasing school funding by £14bn and £33.9bn into the NHS.
If the Tories win the election, the future of interest rates will depend on the type of Brexit we end up with. A no-deal Brexit will result in rate cuts by the Bank of England. The chance of a cut in interest rates in the coming months have increased after two members of the BoE’s key policy body voted for cheaper borrowing in response to a growth downgrade. The bank expects the level of national output - the gross domestic product - over the next three years to be 1% lower than anticipated in August.
A cut back in rate will be bad news for savers but good for mortgage holders. On the other hand, if the UK depart with a deal, it may encourage the Bank to raise rates. The base rate has been at 0.75 percent since August last year and has not been above 1 percent since February 2009. Prime minister Boris Johnson has previously talked about raising the threshold at which you start paying higher-rate income tax in England from £50,000 to £80,000.
Other reformations include the consideration of scrapping inheritance tax and pension tax rules. The Labour party increases the likelihood of a rate rise as they are expected to borrow heavily. This is due to its public spending commitments. The party’s chancellor John McDonnell unveiled a plan which promises to deliver a “irreversible shift in the balance of power and wealth in favour of working people.” They plan to double investment spending.
This means more money spent on long-term projects. Capital investment is money allocated by a firm in assets that makes possible achieving the business’ financial objectives. Investment in health this year is set at £6.7bn, and for education it is £5.1bn. A ‘Social Transformation Fund’ has also been promised - an upgrade to schools, hospitals, social care facilities and council homes. With 178 schools in poor condition, according to the National Audit Office report in 2017, Labour have said they will invest an average of £30bn a year for five years.
The government can borrow for 30 years for an effective interest rate of 1.25 percent and many economists are arguing that it makes sense to borrow at such low rates for projects that will give a bigger return than it costs to fund them. However, individual taxpayers will also be charged a little more than they are currently - especially if you have an inheritance above £125,000.
“Many high-net worth individuals are worried about having to pay much higher taxes…”.
- Geoffrey Todd, a partner at the law firm Boodle Hatfield
Mortgage broker, Ray Boulger, says, “The plans of a Corbyn government to nationalise vast sections of the economy would inevitably result in an increase in government borrowing, the expectation of which would push up interest rates. Fears that Labour policies would create capital flight and a further fall in sterling would also contribute to interest rates rising. The cost of fixed-rate mortgages would increase very quickly.”
In the event that the Lib Dems win an overall majority to govern, the first thing Jo Swinson said she would do as prime minister is to revoke Article 50 and cancel Brexit. According to the Institute for Fiscal Studies, this would be the “best economic outcome” and interest rates would rise quickly. Their plans also include the introduction of a flat 25 percent rate of tax relief on pension contributions, abolishment of employee national insurance payments and for everyone to have a lifetime tax-free inheritance of £250,000.
Next time, in the final article of The Brexit Vote series we’ll be exploring the impacts of Brexit on health and social care.