By Will Hobbs, Head of Equity Strategy UK & Europe
The UK Budget will have little immediate effect on local or global portfolios. Generally, we advise staying invested, and continuing to favour stocks over bonds, both tactically and strategically. The structural changes in savings policies are welcome, but will have little macroeconomic significance in the short or even long term.
Main points: a little more growth, a lot less inflation and no return to the 1930’s
- Economic projections: more growth, less inflation - the OBR has lifted its growth projections a little further, to 2.5% from 2.4% for 2015 and it has revised its inflation forecasts sharply lower from 1.2% to 0.2%, with the latter a function of the effects of plunging oil prices. Further out, trend growth is revised a little higher to reflect stronger population and employment growth associated with higher rates of inward net migration. It is worth noting that the OBR’s forecasts for GDP growth remain below those of both the private sector consensus and the Bank of England.
- Deficit and debt - The Chancellor announced a reduction in his borrowing forecasts (meaning that the government is back on track to see debt to GDP falling in 2015/16), a scaling back of outer year austerity (spending as a proportion of GDP is no longer expected to fall to 1930’s levels), whilst also managing to play a little measured politics ahead of the elections.
- Some politics… - The introduction of more tax avoidance measures, alongside a higher bank levy and a reduction in the pension’s lifetime allowance afforded the Chancellor some room to spike some of the opposition’s guns ahead of May’s election. To this end, there was the widely expected rise in the personal allowance (£11,000 in 2017), a tax cut for the oil sector and a cut or freezing of alcohol and fuel duties.
- Some other points of interest - The introduction of a tax free allowance on savings income should prove popular. Meanwhile the announcement of a first time buyers ISA may draw headlines but may not meaningfully change the ability of first time buyers to affordably get on the housing ladder.
The budget did little directly to affect the immediate investment outlook: Further attempts to mollycoddle investors by the Federal Reserve were significantly more important for the direction of capital markets than the Chancellor's comments. Business as usual, you might say: the annual budget speech has long since ceased to be a market-mover, and the amount of coverage it gets is inversely related to its macroeconomic importance.
It is also worth remembering that economic forecasts, particularly beyond the very near term, should not be accorded much oxygen.
The welcome for more flexible disbursements from pension funds also has to be tempered by an awareness that many consumers may not be able to make informed choices about draw downs to begin with (hence the requirement that advice be taken). But on balance, saving looks a little more attractive than it did, and the post-crisis trend towards greater simplicity and liquidity in savings products has been given a further boost. This is good news for customers. It is also good news for the UK financial services industry.