By Kevin Gardiner, Chief Investment Officer, 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 falling deficit is a reflection of solid economic growth, and not in itself a reason to buy gilts. The structural changes in savings policies are welcome, but will have little macroeconomic significance in the short or even long term.
Main points: solid growth, falling deficit, no change in fiscal stance
- Economic projections: more growth, less inflation - the OBR is as usual just catching-up with news already built-in to private sector forecasts. It has lifted its growth projections a little further, to 2.7% from 2.4% for 2014, and to 2.3% from 2.2% for 2015; and it has trimmed its inflation forecasts from 2.3% to 1.9%, and from 2.1% to 2.0%.
- Deficit and debt ratio forecasts trimmed - largely reflecting stronger economic growth. The debt ratio is projected to peak at a lower level and fall slightly faster – but the changes are marginal, and follow last year’s slippage in the other direction.
- Net new policy changes small – a myriad small changes to taxes and spending plans add up to an overall fiscal loosening in 2014/15 and 2015/16 of just £0.5bn and £0.6bn respectively, which is inconsequential in the context of UK GDP of £1.7 trillion. This is not a conventionally electioneering budget.
- Micro matters – modest tax cuts (most notably the increase in the personal allowance from 2015-16) are paid for with reduced spending projections, and the ratio of public spending to GDP is projected to fall to just 38.0% in 2018-19. Measures to stimulate business investment, and to support exports, may help to rebalance the mix of economic activity, but only marginally. Meanwhile, the Help To Buy scheme is extended to March 2020. The major news was the increase in ISA limits and the ending of the requirement for DC pensioners to buy an annuity, but the net short-term fiscal impact of the two changes is negligible.
The Budget did little directly to affect the immediate investment outlook: US Federal Reserve Chair Janet Yellen's comments (on the speed with which US interest rates might rise) were more important for capital markets than the Chancellor's. 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. However, this one may have some meaningful consequences for the way in which investment portfolios are accumulated and eventually liquidated.
Don't get carried away by the media commentaries. The savings ratio is not about to double overnight (thankfully: it would be bad news if it did, as the economy would plunge instantly back into recession and the funding of our aggregate pensions would get worse, not better). 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 drawdowns 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, though it may not feel so this morning. It may not however do much to lift the UK’s long-term economic growth rate, and not just because of the “paradox of thrift” noted above: the key determinants of long-term growth are the pace of innovation and learning, and the availability of labour.