Monday 11 January 2010

Quick question

Does anyone know what happened to equities the day of the 1997 Budget? Given that the Government abolished tax credits on dividends you might expect them to have dropped, to take account of the diminished future income stream that must surely have been expected. Or had investors already factored the probability of tax credits being abolished into their valuations?

I don't remember there being a big drop on the day, but maybe I'm mistaken. So if not, what's the story?

3 comments:

John B said...

Remember that the government cut corporation tax at the same time by a directly offsetting amount (evening up taxation between shareholders eligible for tax credits, ie pension funds, and those who weren't, ie everyone else) - so there shouldn't have been any significant overall effect on expected returns for The Average Shareholder and hence on share prices.

Tom Powdrill said...

Good point. Which leads onto my real question - does that mean that all those "Labour steals £100bn from pensioners" type headlines were slightly bollox.

Calvin Allen said...

Tom,

Ken Clarke, as Chancellor up until 1997, was also being advised on similar moves, so it may be that the eventual move to do had already been priced in. An article in the Independent dating back to 1994 also suggests:

'If Kenneth Clarke did go ahead with a reduction in the rate of advance corporation tax and the corresponding rate of tax credit paid to tax-exempt investors such as pension funds, the adverse effect on share prices could be limited by cutting the rate of corporation tax.'

(http://www.independent.co.uk/news/business/green-budget-suggests-tax-or-interest-increase-to-keep-inflation-on-target-1442693.html)

Far from an authoritative source, I know - but it would suggest that share prices would have seen the move on reclaiming ACT, in combination with the reduction in coporation tax, in a neutral fashion.

Furthermore, a new Labour government, determined not to frighten the City (and committed to staying within Tory spending plans for the first two years after 1997), might well have seen this move in just the same way...