This year’s Spring Budget will be of little relevance to local or global portfolios. Generally, we advise staying invested, and continue to favour equities over fixed income, both tactically and strategically. Chancellor Hammond’s budget speech also did not significantly alter our medium-term macroeconomic outlook for the UK.
Main points: faster growth in 2017, but slowdown ahead
- Economic projections: higher growth and inflation this year: The Office of Budget Responsibility (OBR) is more optimistic about growth this year, hiking its annual growth forecast from 1.4% to 2.0%. But in the period to 2021 as a whole, growth is actually expected to be slightly lower than predicted in last November’s Autumn Statement. The fall in sterling is expected to push inflation beyond the Bank of England’s 2.0% target for 2017, with inflation averaging and peaking at 2.4%. The OBR forecasts inflation to gradually level off and return to target from 2019 onwards.
- Public finances in better shape: A faster than expected pace of growth will give a boost to the UK’s borrowing bill this year. However, the OBR said there has been no structural improvement in the public finances, and has left its forecasts for the rest of the next five years virtually unchanged.
- More spending on social care: Pressures on the NHS and care for the elderly are addressed with an extra £2bn in grant funding over the next three years – with £1bn made available in 2017/18. Struggling local authorities will also be identified and helped to work more closely with the NHS. Chancellor Hammond also announced that options for long-term funding of the social care system will be set out over the next few months.
- Two other points of interest: First, the rise in National Insurance contributions for the self-employed has been highlighted by many in the media as clashing with the traditional Conservative commitment to entrepreneurship. It is a potentially provocative move in a country where a large and growing share of voters work for themselves, particularly jarring, as it does, with the 2015 Conservative election manifesto. It is worth noting that overall, the self-employed will still enjoy more favourable taxation, but the gap relative to employees will narrow. Some have gone so far as to suggest that a budget containing such a potentially unpopular message to the Conservative heartlands provides further confirmation that snap elections are not imminent – but this is obviously speculation. Second, the reduction in the tax break on dividends was presented as a strategy to weaken the attraction of incorporation and to reduce what the Chancellor sees as too generous a tax break for investors with substantial portfolios. From a macroeconomic perspective, some have argued that this should help incentivise company owners to reinvest rather than extract revenues. Maybe, though we would also point out that investment decisions tend to hinge on a variety of other influences over and above relative tax efficiency.
The Spring Budget did little to affect our immediate investment outlook: Today’s release of US ADP job figures, German industrial production readings and Chinese trade data were more influential for UK capital markets than the Chancellor's fiscal plans. Business as usual, we would say: the 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.
Overall, the Spring Budget is not something that will fundamentally alter the near-term path of the UK economy, nor will it have any significant impact on global investors’ outlook of the UK. Ultimately, factors such as global aggregate demand, the response of private consumption to higher inflation, and how domestic business confidence weathers the fast approaching Brexit negotiations will be the key determinants of growth over coming quarters.
It is also worth remembering that economic forecasts, particularly beyond the very near term, should not be accorded much oxygen.