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UK Autumn Budget 2018

An end to austerity

30 October 2018

3 minute read

In this summary, our Investment Strategy team reflects on the likely economic impact of the budget announcement.

The budget presented by Chancellor Hammond today was a relatively subdued affair in terms of market-relevant announcements. As a result, this budget will be of little immediate consequence to local or global portfolios. Generally, we advise staying invested, and continue to favour equities over fixed income, both tactically and strategically. Needless to say, Chancellor Hammond’s budget speech did not significantly alter our medium-term macroeconomic outlook for the UK.

Main points: Fiscal loosening

Economic projections: slight upgrade to growth forecasts

Growth forecasts from the Office for Budget Responsibility (OBR), the UK’s fiscal watchdog, were a little more upbeat than expected. The OBR now expects year-over-year GDP growth to average 1.5% between 2019 and 2022, up slightly from 1.4% in the Spring Statement.

Public finances: a brighter outlook

Forecasts for government borrowing in 2018 have been revised downwards by £11.6bn, meaning that borrowing as a percentage of national income would slightly decrease. Debt is also projected to fall as a share of national income from 2017-18 onwards, from 84% to 74% by 2023-24.

Fiscal spending: looser purse-strings

Positive revisions to growth and borrowing projections, coupled with a windfall from better-than-expected tax receipts, have given Chancellor Hammond enough leeway to meet the Prime Minister’s spending pledges (most notably an extra £20bn for the NHS over the next five years), while maintaining the buffer he has built up to handle the potential fallout from a no-deal Brexit. With real government spending projected to rise by 1.2% over the next five years, the Chancellor has, to some extent, fulfilled the Prime Minister’s pledge to end austerity. On balance, the fiscal stance is now set to turn from a slight headwind to a small tailwind throughout the Budget’s forecast horizon.

Other points of interest

As expected, Chancellor Hammond announced plans to introduce a ‘digital services tax’ from April 2020 following a consultation. The 2% tax will only be paid by digital services companies that are profitable and generate at least £500m a year in global revenue. Here, it’s clear that the government’s intention is for this new tax to be shouldered by tech giants of the likes of Amazon, eBay, and Google, rather than start-ups.

Comment

The Budget 2018 did little to affect our immediate investment outlook. 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 Budget 2018 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’ expectations of the UK’s capital markets. In fact, the final outcome of the Brexit negotiations arguably matters more for the UK’s public finances than anything mentioned in the Budget 2018. A disruptive no-deal scenario will likely worsen the state of the UK’s public finances through lower tax receipts and higher fiscal spending. Here, Chancellor Hammond has made a wise decision to leave some fiscal buffer until the next Spring Statement.

Further out, the threats and opportunities remain roughly the same for the UK economy. On one hand, the UK should continue to benefit from a flexible and growing workforce, first rate institutions and a stable rule of law. These will remain important,in the perpetual battle to attract international investment and capital flows. On the other, given all the inevitable disruption and expense that comes with disentangling itself from its largest trading partner, we expect the UK’s long-term growth rate to suffer from a combination of lower immigration and higher barriers to trade.

It is also worth remembering that economic forecasts, particularly beyond the very near term, should not be accorded much oxygen. Given the inherent difficulties of formulating multi-year economic forecasts, we would take the OBR’s upgraded growth and borrowing projections with a pinch of salt.

Investments can fall in value; you may get back less than you invest. This budget commentary does not constitute a recommendation or advice of any kind. Past performance of investments is not a reliable indicator of their future performance.

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The value of investments can fall as well as rise. You might not get back what you invest.