Growth on the horizon
The latest GDP figures show growth returning, but in what form?
July’s news that UK gross domestic product (GDP) had grown by 0.6% in Q2 was good news for the Chancellor, who was confident that Plan A was working. It was very different from just over three months previous, when there was a possibility of a negative Q1 GDP number, marking the second consecutive quarter of economic contraction and the arrival of a triple-dip recession.
In the event, the first quarter GDP grew by 0.3%, an unusual upside surprise. A couple of months later the Office for National Statistics (ONS) gave Mr Osborne another fillip. A revised Q1 2012 GDP figure, up from -0.1% to 0.0%, meant that the double-dip recession disappeared: there were no longer two consecutive quarters of contraction.
The latest GDP numbers show the four main sectors of the economy − agriculture, production, construction and services − all grew over Q2, a simultaneous performance not seen since 2010. The main driver of growth was the service sector, and within that the largest contributions came from ‘Distribution, hotels and restaurants’ and ‘Business services and finance’. The political aspiration of a ‘rebalanced’ UK emerging from the financial crisis with less reliance on consumers and financial services shows little sign of becoming reality. For once, construction rose over the quarter (by 0.9%), but for all the money being pumped into housing support schemes, construction is currently only 6.3% of GDP − whereas services are 77.8%.
UK GDP peaked in Q1 2008 and even now we are still 3.3% below that summit: it will take another six quarters of growth like Q2’s before new ground is broken. That growth will need to survive the slings and arrows of continued austerity and the spectre of a reanimated Eurozone crisis. For now it looks possible, but then, as 2013 has already proved, a lot can happen in just three months…
Final curtain for VCT buybacks
The days of round-tripping for venture capital trust (VCT) tax relief are coming to an end.
A VCT enhanced buyback scheme appears to offer a ‘tax-relief-for-almost-nothing’ deal. For example, in March 2013 this was how a typical scheme for the Proven Growth & Income (PGOO) VCT worked alongside a new share issue:
# An investor with 10,000 PGOO shares bought more than five years earlier − so no tax claw back − sold them back to the company at their net asset value of 80.1p a share. At the time, the shares’ market bid price was 61p.
# The £8,010 the investor realised was immediately reinvested at 82.6p, creating a new holding of 9,697 PGOO shares.
# The investor claimed 30% tax relief on their £8,010 ‘investment’, i.e. £2,403, for the price of cutting their shareholding by about 3%. In July, HMRC and the Treasury issued a technical consultation on VCT buybacks in which it was noted that in 2012/13 such schemes raised over £130 million − almost 30% of total VCT inflows. The Government now wants to stop this recycling, but it still allows VCTs to buy their own shares, given the limited liquidity for many companies’ shares. Two main blocking measures are suggested. Tax relief would not be given either where:
# an investor subscribes for shares in a VCT within a certain period after a sale of shares in that VCT or another VCT with the same fund manager; or
# where a VCT’s repurchase of shares is subject to any understanding that the investor will reinvest in the same VCT or another from the fund manager’s range. The paper also floats a couple of ideas about revising the rules that apply to the VCT’s investment, but acknowledges that these “would be less likely to deliver the desired policy aims… [and] would add further complexity.” Although the paper suggests that any change would be introduced from April 2014, it warns that the Government “may consider taking action at an earlier date if necessary to prevent forestalling.”
UK posts first July budget deficit since 2010
The UK has posted its first July budget deficit since 2010 thanks to a rise in Government spending, a sign that public finances have yet to benefit from the improvement in the economy.
National Statistics (ONS) data shows net borrowing, excluding temporary support for banks and the effects of the transfers from the Bank of England’s asset purchase facility fund, amounted to £488 million in July − a drop from the £823 million surplus recorded a year earlier.
July usually sees the UK post a budget surplus, because quarterly payments on taxes on corporate profits and self-employed people are collected along with payments from oil companies. This year, the 3.7% increase in Government spending undermined the 3.4% rise in tax receipts.
The UK’s economic indicators have been more positive in recent months, with GDP growing by 0.3% in Q2. This has not yet been reflected in government borrowing figures. According to the ONS, public sector net debt excluding the temporary effects of financial interventions was £1,193.4 billion at the end of July, equivalent to 74.5% of GDP.