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Brits Look to Budget for Brexit Answers

As the U.K. Chancellor prepares to outline his fiscal program for the coming year, investors consider the ramifications…

All eyes in the City of London will be keenly fixed on parliament Wednesday, when the U.K. Chancellor Philip Hammond makes his annual budget statement to the house.

Asset management firms and investors typically watch the budget announcement to gauge the impact that fiscal decisions will have on investment flows and whether new initiatives will change investment into, or from, industry sectors.

The U.K.’s decision to leave the European Union means the government will need to rejig fiscal policy to plug areas of funding that will be lost when the country leaves the trading bloc in 2019.

Among the challenges is resolving the loss of funds for British infrastructure projects from the European Investment Bank. The Royal Institution of Chartered Surveyors is lobbying for the government to establish a U.K. Infrastructure Bank, based on the model of the Green Investment Bank which was created in 2012 to attract private funding for environmentally friendly projects.

“Potential loss of EIB funds for U.K. infrastructure could result in shovel-ready energy and transport projects being stalled,” according to a statement by Lewis Johnston, parliamentary affairs manager at RICS. “As such we call on government to commit to introducing a dedicated Infrastructure Investment Bank.”

[II Deep Dive: Concerns Mount Over U.K. Infrastructure Funding]

Fund firms will also be looking for their own solutions.

In September, City Minister Stephen Barclay announced that the government was establishing a task force of investment management CEOs, investor groups, and regulators to resolve issues arising from Brexit such as cross-border distribution.

However, paying the bill to leave the European Union means raising extra cash, so fund firms will want to see Philip Hammond offering some reassurance on last year’s announcement that he would be cutting the corporation tax rate. Consultants say the move is an important policy to ensure that investors continue to see the U.K. as an attractive destination for inward investment.

“Asset managers will be keen that the Treasury reaffirms its commitment to the 17 percent corporation tax rate in 2020,” explained Gill Lofts, U.K. leader for wealth and asset management at EY.

International investment will be front of mind for investment managers watching the speech, but domestic policy also has the potential to shape flows, particularly into pension funds.

Some commentators believe that pensions' tax allowances will be in the crosshairs, as the Chancellor seeks to raise much needed cash for public sector pay, social care, and the National Health Service, among other things.

The current rules allow most Britons to save up to £40,000 tax-free for retirement each year. This ‘annual allowance’ was reduced from £50,000 in 2014/2015. This reduction is projected to raise an additional £1.1 billion in tax revenue in the current tax year, according to an analysis from investment group Royal London.

However, recent reforms to public sector pensions, which changed benefit entitlements from an individual’s final salary to his or her career-averaged earnings, offers the Chancellor an opportunity to cut the annual allowance, according to former pensions minister Steve Webb.

“A general annual allowance was needed to avoid such individuals facing a big tax bill when they were promoted,” he explained. “However, public service pensions are now based on a career average basis which means that promotions do not create the same surge in pensions rights. The government may conclude that they can now justify a much lower annual allowance.”

In addition to cuts in the annual allowance, Webb suggests that the Chancellor may also look to cut higher earners' pensions allowance and the lifetime allowance to raise more cash.

The annual U.K. budget speech takes place at 12:30 GMT, on Wednesday, 22 November 2017.

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