Goldman Sachs expects rethink on bank levy in UK Budget

7th Jul 2015 12:43

Ahead of Chancellor George Osborne's Budget on Wednesday, here's a round-up of what Goldman Sachs expects.For UK banks, attention will be focused on any potential reform of the bank levy, as Osborne did not discuss it in his Mansion House speech in June, despite prior speculation.Goldman does not expect the overall amount raised to change, however, it said we could see the Chancellor shift the burden of payment. The two most likely measures to achieve this are charging the levy on UK, not global, balance sheets and replacing the levy with a corporation tax surcharge for banks."In either case the likely impact would be to more align the amount of tax paid with the size of a bank's UK operations," said GS, adding that in principle, this would be positive for HSBC and Standard Chartered, but negative for domestically-focused banks such as Lloyds.For the insurance sector, the main focus will be any further changes to the UK pension/annuity industries. In light of recent shifts in tax requirements, including the pension freedom reforms, Goldman doesn't expect further significant changes.However, the bank said that recent experience within the UK life space has taught it to "never say never".If a change does occur, the most likely policy is a further reduction to tax relief on pension contributions, which was flagged as a possibility by the Conservatives in the run-up to May's election, and so should not come as a major surprise to the market.The rhetoric to date is not suggestive of further wholesale changes for the industry beyond this, said GS, adding that the most exposed names to UK pension/annuity reforms are St. James's Place, Standard Life, Aviva and Legal & General.Goldman expects the UK defence budget to decline by £500m, down 1.5% from £34.5bn in full-year 2014-15. This is based on comments made by Osborne on 4 June, when he outlined early cuts to several government departments."The cuts will come mainly through efficiency savings in the MoD Civil Service, reduced travel spend and equipment savings," said the bank. It added that the most exposed companies in the sector are BAE Systems, Cobham, Qinetiq and Ultra Electronics.Goldman does not expect any change to the excise duty hike on tobacco already announced, which was 2% above inflation effective from 18 March.As far as beverages are concerned, it said the Budget is rarely a big event for its European coverage. "Given that the last budget saw excise cuts of 1p per pint of beer with cider and spirits duty both down 2% it would be unlikely that excise is increased again," said GS.For UK housing, it does not expect any change to the 'Help to Buy' ISA that was introduced in Budget 2015. However, it said that according to press articles, an area of focus could be tax relief on mortgage interest for buy-to-let investors. "If this tax relief was to be reduced in some way or eliminated, this could make buy-to-let investment relatively less attractive and may adversely affect overall housing transactions," said the bank.Where utilities are concerned, it said the announcement of the Competition and Markets Authority's preliminary findings in its energy market investigation on Tuesday is likely to overshadow the impact of the Budget.From the budget, the most likely impact is from any changes to the government's Carbon Price Support, it said. Goldman noted that in the Spring 2014 budget, this was frozen at £18 per tonne until 2018/19."Any increase would translate into higher power prices and would be a net positive for Centrica and SSE (broadly neutral for Drax)."