Cash & Investment Management

UK Budget Focus – Q1 2017

Monday 20th March 2017

Going into this year’s Budget (the last in spring), the headlines were far from inspiring, with the most boring Budget ever seeming to be the consensus view. Philip Hammond however made sure this wasn’t the case with an embarrassing decision to increase National Insurance on nearly 2.5m self-employed workers being scrapped within the week. This was at odds to one of David Cameron’s central pledges in the 2015 Conservative manifesto. In a sign of acceptance that they made mistakes, Treasury officials are understood to have apologised to the Chancellor for not spotting this. Labour’s Jeremy Corbyn said the U-turn showed a government “in chaos”.

What also remains unanswered is the £2 billion hole that is left following the policy reversal. There was some concern at rumours that the Chancellor may attack the tax relief on pension contributions. Baroness Altmann, a leading pension expert who also served in David Cameron’s government, warned that Mr Hammond’s predecessor George Osborne had balked at hitting pension tax relief. One policy under consideration is a flat-rate of tax relief on pension contributions.

Despite the overall caution there was some boost for health spending, with £2 billion of additional grant funding for social care in England over the next three years. In addition, £325 million of capital is being used to for ‘transformation plans’ in the NHS, with a further £100 million being used for new triage projects to support A & E.

From a wider economic perspective there was positive news with the Office for Budget Responsibility (OBR) now forecasting the economy to grow by 2%, up from its previous forecast of 1.4%. However, growth is then expected to slow to 1.6% the following year, before gradually accelerating to 2% by 2021. The OBR also expects government borrowing for 2016-17 to be £51.7bn – a fall of £16.4bn from its November forecast and £4bn lower than the 2016 Budget figure. By 2021-22 the deficit is forecast to fall to £16.8bn.

UK employment also looks good. It is expected to grow every year with a further 650,000 people in work by 2021. At some point, workers would want to see the full employment situation reflected in higher wages. Inflation will peak at 2.4% this year before falling to 2.3% in 2018 and 2% in 2019. The short spike clearly reflects the post Brexit vote fall in Sterling, but greater exports and translation gains have offset price increases. The recent pull back in energy prices will also help the data. Interestingly there has been a softening in some of the key measures of UK consumer health in recent months.

Retail sales have decelerated and consumer credit growth also appears to have stalled. This has led some observers to get increasingly bearish on the UK economy, with the threat of stagflation not too far away. Any squeeze on real incomes could lead to consumer retrenchment. However, the major saving grace has been the housing market which continues to be strong and creates the valuable ‘wealth effect’.

The Austerity mantra is still very much in evidence and rather than being completed, the UK is probably only still half way through fiscal consolidation. Indeed, the tax burden on the nation continues to rise and is forecast to be 37.5% of GDP by 2026, which represents a forty year high. Notably missing from the budget was any mention of the possible exit bill from the EU, which some estimate to be as high as €60 billion.

There was also relative lack of focus on Brexit, with the government choosing to state that it is not obsessed with the details of leaving the EU. Maybe they are concerned at the short term cost on the economy and hence the comment to ‘leave enough gas in the tank’. There has been unrest within Government that many of the key departments that need to deliver on Brexit have had their internal budgets slashed. Both the Foreign Office and the Trade Department have been ordered to outline 6% spending cuts.

The Chancellor instead felt it was a good opportunity to focus the public’s mind on long term technology changes and adding to the skill set of the workforce. Spending commitments included £270m to put the UK “at the forefront” of disruptive technologies. The first wave of projects will include funding development of batteries for electric cars, new medicine manufacturing technologies to help get drugs to patients faster, and robotics systems used in dangerous situations such as offshore energy, nuclear reactors or deep mining. Funds for 1,000 new PhD and fellowship positions in science, technology, engineering and mathematics. There was also the commitment of £200m to support local “full-fibre” broadband network projects that are designed to bring in further private sector investment. There was some concern at the lack of focus on cybersecurity.