Monetary policy, election and Brexit

  • Author : Novia Financial
  • Date : 11 Dec 2019

Who holds the cards to win this important vote?

In the last month, with the election and Brexit looming, the news has been flooded with details of manifestos, spending plans and electoral debates, with a range of promises and budgets and varying considerations of what they might mean for both individuals and the industry, not to mention where the economy currently sits in the midst of electoral campaigning.

On 7 November 2019 the Bank of England published its Monetary Policy following the meeting of  the Monetary Policy Committee (MPC) the day before, in which they voted with a majority of 7-2 to maintain the Bank Rate at 0.75%. The report confirmed that the Committee’s new projections for activity and inflation were based on the assumption of an orderly withdrawal from the European Union, and a deep free trade agreement.

The Bank of England did acknowledge that underlying UK GDP growth had slowed in the last year, due in part to the domestic impact of Brexit related uncertainties, but following the flexible extension of Article 50 in October 2019 the likelihood of a no-deal Brexit has fallen and sterling has therefore appreciated, with UK GDP growth currently expected to increase during 2020.

Business investment growth is projected to pick up, as shown in the below graph:

Nopvia Financial – Monetary policy, election and Brexit

Source: ONS and Bank of England calculations.

Against the backdrop of a somewhat more optimistic and reassured economy, the political parties began to release their political manifestos to explain the plans they hope to be able to deliver as the next government. As with any election this naturally leads to financial analysis and scrutiny of plans to try to determine which are financially viable and the effects that they may have on the economy, and more specifically the finance industry.

Corporation Tax

It’s always difficult for parties to agree upon tax measures, and, having do so, to implement to the changes. The tax system in the UK is quite complex and any changes will obviously have knock on effects on the performance of individuals, corporations and the economy as a whole. The Institute of Financial Studies (IFS) has carried out comprehensive financial analysis for each of the major parties’ promises on tax.

Maintaining a competitive level of Corporation tax is key to helping stimulate entrepreneurship, company performance and economic growth, as well as generating revenue for HMRC. The current Conservative government had promised to reduce Corporation tax to 17% by 2020. The three large parties have since proposed differing plans for corporation tax; Labour wish to increase corporation tax from 19% to 21% from April 2020, and to 26% by 2023. This would potentially generate £23bn (also allowing for the increase in “small profits rate”). The Liberal Democrat party has proposed raising corporation tax back to 20% (where it was in 2015), creating a revenue of £10bn, and the Conservatives plan to maintain corporation tax at 19%, scrapping original plans to lower it to 17% by 2020.

Novia Financial – Monetary policy, election and Brexit

Source: Institute for Fiscal Studies (IFS).

It is important to note that changes do have a direct impact on companies, many of whom have been planning and budgeting for a continued reduction in corporation tax for 2020. This will therefore not only affect businesses but will likely also impact workers, customers and shareholders.

Capital Gains and Dividends

One of the Liberal Democrat’s key proposals is the abolition of the Capital Gains allowance. The current Capital Gains tax allowance is £12,000 for 2019/20. Any capital gains on top of this are taxed at 10% (basic rate payers) and 20% (higher or additional payers). The proposed action would be expected to raise £5.7bn of revenue, but would mean many more people would need to complete a self-assessment form, and would impact investors with assets outside of a tax efficient vehicle such as a Stocks & Shares ISA or a SIPP. Labour instead intends to tax Dividends and Capital gains in line with income tax brackets (current rates shown below) and abolish entrepreneur’s relief, raising an additional £14bn. The Conservative party has stated that there will be no increases to Income Tax, National Insurance or VAT. However, they have not specifically commented on Dividends, Capital Gains or Inheritance tax, so this avenue would be available to them if the need to raise additional revenue were to arise.

RateTax BandIncome tax rateDividend tax rate
Starting Rate for Savings£1-£5,0000%N/A
Basic rate£1-£37,50020%7.5%
Higher rate£37,501-£150,00040%32.5%
Additional rate£150,000+45%38.1%


Brexit still remains an important factor, and although an extension has been granted, the various party commitments are made working on different assumptions about the Brexit scenario. The Conservatives are committed not to extend the transition period beyond 31 December 2020. The Liberal Democrats are wishing to revoke Article 50 which assumes national income would be £50bn (2%) higher in five years. Labour want to achieve a ‘softer Brexit’ or allow the people to choose no Brexit at all. This softer Brexit would include a single market relationship which would boost growth.

Public Finances will be impacted, and all parties have acknowledged that spending needs to increase, but disagree greatly regarding the extent. Such spending increases would be to a higher level than previously anticipated, and quite high on an international level.

Novia Financial – Monetary policy, election and Brexit

We will await the election results on 12 December with great interest, but will need to wait a little longer to see what policies will be implemented, as well as what the outcome of Brexit will be. Policies still have to be agreed and passed through Parliament, and therefore the election of any one party neither guarantees nor rules out the implementation of a new policy.


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