FINANCE AND INVESTMENT
BY CUSTOS
CRITICAL as it is of the general principles underlying Socialist economic policy the City has little fault to find with Mr. Dalton's interim budget. From the broadest standpoint the budget pro- posals must be judged sound and constructive. There is to be no relaxing of the Government's tight grip on the cost of living—even at the expense of a further substantial increase in an already heavy bill for subsidies—the release of spending power is to bz strictly controlled, while at the same time some financial incentive is to be given to producers to buckle down to their urgent task of expanding output both for the home and export markets. Mr. Dalton has indeed succeeded in reaching an effective compromise between the countering of inflation on the one hand and the restoration of incentive on the other, and in the process has leavened his budget with just enough " equalising " doctrine to satisfy his party's election mandate. The income-tax and surtax proposals are socially' just, and if only the budget were flanked by a real policy on wafts and more promising indications that the country as a whole was pre- paring to get down to hard work I should feel that the economic future was assured.
THE E.P.T. SURPRISE
In the stock markets the budget has naturally been given an enthusiastic reception. Few people had expected a reduction in the standard rate of income-tax and even fewer had dared to hope for a cut in E.P.T. from too to 6o per cent. The lower income-tax will. of course lead to a modest increase in the next profits of all com- panies, oilier things being equal, and therefore justifies some im- provement in equity share prices as a whole. Much more striking effects on available net profits may be expected, however, from the 40 per cent, reduction in E.P.T.
As I have often pointed out in these notes, the position of com- panies which have been heavy payers of E.P.T. during the war years may be revolutionised now that this impost is to be so materially reduced. Much depends, of course, on what happens to these companies' gross earnings. In some cases the high profits of recent years have been due entirely to war-time influences which must now be expected to weaken, if not to disappear altogether, as Govern- ment contracts run out and are not renewed. There are many companies, however, which may reasonably be expected to retain at least a part of their recent prosperity and whose net earnings position will benefit very substantially from the E.P.T. change. Among these I would include British Celanese, Dunlop Rubber. Purnell and Sons, Cementation, and Methuen, the publishers. In cases such as these I should expect the E.P.T. cut to find reflection in substantially larger distributable net profits in the coming years.
Having said that, I think investors would do well to remember that distribution policy by boards of directors is likely to be on the cautious side. Not only has the Chancellor of the Exchequer ex- pressed his hope and expectation that increased net profits will not be paid away in higher dividends, but it should be clear that a large number of companies will need no official urging to adopt a policy of ploughing back any increase in earnings into the business. Much money is required both for plant modernisation and re-equipment and for general 'expansion purposes.
THE REFUND QUESTION
So far as the much-discussed E.P.T. is concerned, Mr. Dalton has made it abundantly plain that these payments, which in the case of some companies will be very substantial indeed, are not to be applied to paying higher dividends. He even hints that definite conditions are to be imposed by the Treasury which companies will have to fulfil before E.P.T. refunds will be raid over. Just what such conditions will be and how they will be applied it is hard to imagine, but investors would obviously be well advised not to rely on these funds in any estimates they may make of future dividend possibilities. It is also worth keeping in mind that in announcing the E.P.T. cut Mr. Dalton disclosed that he had been toying with the idea of replacing E.P.T. by some other tax to be levied on company profits as a whole. Fortunately he has recognised that such a tax, unless applied with great moderation and skill, would create injustice and might aim a fresh blow at business incen- tive. It must not be lightly assumed, however, that the idea has been abandoned.
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