Key events
UK borrowing costs fall, as 2-year bond yields hitting 14-month low
British two-year bond yields have hit their lowest level since May 2023.
They have having dropped as low as 3.864%, down 5 basis points on the day.
Falling bond yields suggest there is more demand and appetite among investors to own UK debt.
It comes as investors price in comments from Reeves’ public spending statement, and the Bank of England rate decision, due on Thursday this week.
Five-year gilt yields also fell to their lowest level since April to 4.051%, also down 5 basis points.
A reminder that bond yields represent the amount of money an investor receives for owning the debt as a percentage of its current price. When the price of a bond falls, yields rise. The yield is also commonly referred to as an interest rate, or the “cost of borrowing” to an issuer – in this case, the UK government.
Financial markets have priced in a 58% chance that Bank of England policymakers will vote for a 0.25% cut to the base rate this week, which currently stands at 5.25%,.
There is growing speculation that chancellor Rachel Reeves could try fill the public finances gap by raising capital gains tax (CGT) to match income tax levels.
Sarah Coles, head of personal finance at Hargreaves Lansdown, said:
As Rachel Reeves peers into the hole in the public finances and is set to reveal just how deep it goes, rumours are swirling as to whether CGT changes could be used to generate extra cash to help fill it.
One of the suggestions doing the rounds is that capital gains tax rates could rise to match income tax. It was one of the things the Office for Tax Simplification explored in 2020.
The 2022/2023 financial year was a record year for CGT returns, adding £16.9bn to public finances. (Final annual details will be reported on Thursday, including breakdowns of types of gains).
But Hargreaves, which is an investment platform for everyday savers, is – perhaps unsurprisingly – against a rise in CGT. Coles said:
It’s a common myth that ‘no-one pays capital gains tax’. It is true that most of this tax is paid by a relatively small number of people, but the rapid increase in the amount of CGT paid, the cuts to the annual tax-free allowance, and the numbers paying this tax show it’s something all investors need to consider.
They note that the number of people paying CGT rose by 50% to 394,000 over 5 years to 2021/2022, and that the annual tax-free allowance was cut from £12,300 in 2022/23 to £3,000 in the current tax year.
Coles claims that this could run the risk of seeing investors “hoarding their profits until they die”.
She says this could including people who invest in buy-to-let properties, who might hold onto their homes instead of selling them off to new owners or landlords.
Coles says:
This would see a shocking hike for UK investors.
The tax system should be encouraging and rewarding long-term investing. This has been absent from the CGT system since taper relief was abolished in April 2008.
Right now, investors face the double-whammy of a system that taxes investments that are simply keeping pace with inflation and allows for far lower gains to be realised tax-free each year.
If the rates do end up rising, it would add insult to injury. We’d urge the Chancellor to reintroduce incentives that reward long-term investing.
Cabinet Office ministers: Don’t expect tax announcements from Reeves today
The public should not expect any tax announcements in Rachel Reeves’s statement on Monday, Cabinet Office minister Pat McFadden said.
McFadden told Times Radio:
Today is not a budget, people shouldn’t expect tax announcements today.
We said a number of things about tax during the election, we said that we wouldn’t increase income tax rates, national insurance rates, or VAT.
Those things still hold.
Today, what you will hear is how we are going to respond to that opening of the books. And I think what people should expect today is not tax measures but a chancellor that is prepared to take some very tough decisions on spending, to show that we put financial stability first and we take seriously that as the foundation for growing the economy.
Those comments from IFS director Paul Johnson this morning:
‘That is exactly the scale of the National Insurance cuts implemented just before the election’
Paul Johnson from the Institute for Fiscal Studies spoke to #BBCBreakfast as chancellor Rachel Reeves is set to announce immediate cuts aimed at plugging a £20bn black hole in the… pic.twitter.com/J2koZaTLX5
— BBC Breakfast (@BBCBreakfast) July 29, 2024
Introduction: Reported £20bn gap public finances equal to Tories’ national insurance cuts, economics expert says
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
All eyes are on the Treasury today, as UK chancellor Rachel Reeves prepares to issue an update on the state of the country’s public finances and what the Labour party has inherited from the former Tory government.
Reeves is expected to tell MPs that the Tories left a £20bn hole in government spending for essential public services.
And a think tank has now said that the £20bn shortfall is equivalent to the Tories’ pre-election national insurance cuts.
Paul Johnson, director of the Institute for Fiscal Studies, told BBC Breakfast:
It is very striking that if this problem is about £20 billion big, that is exactly the scale of the national insurance cuts implemented by Jeremy Hunt just before the election.
Now, if those cuts were implemented in the knowledge that there was this kind of hole, that is not good policy, to put it mildly.
The Tory government announced 2p would be cut from National Insurance in last year’s autumn statement, and announced a further 2p cut in this year’s spring budget.
The combined cuts were expected to save the average earner £900 a year.
However, the former government was said to have been been looking at further public spending cuts, had the Tories won last month’s election, as one way to pay for the tax reduction. That was despite economists’ warnings that such a move would cause public services to buckle.
Stay tuned as we look ahead to Reeve’s address, which is expected to lay the groundwork for tax rises, cuts to public spending, and delays to some major infrastructure projects.
The agenda
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9:30am BST: UK mortgage approvals, net mortgage lending and consumer credit for June
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3:30pm BST: UK Chancellor Rachel Reeves to set out state of UK public finances
