Boosted by some more solid numbers from the independent Office for Budget Responsibility (OBR) the Chancellor of the Exchequer, George Osborne, combined his Autumn Statement with a five-year spending review in which he detailed where the axe would fall to bring public spending back under control. The carefully constructed message saw cuts to Whitehall departments whilst playing up increases to actual capital spending – essentially announcing cuts to perceived Government bureaucracy whilst increasing spending on actual services on the ground. At least that was the hope, and it is easy to hide behind percentage increases whilst obfuscating the pounds-and-pence numbers.
As we look at the broader global economic and market backdrop, we see monetary policy has driven up equity and bond markets, benefitting asset owners but not providing much real help to underlying economies and those relying on wages for income. As electorates around the world start focusing on this wealth inequality, it’s likely that politicians will come under pressure to provide fresh fiscal stimulus as credibility of monetary policy falters. We started to see some tentative signs of this in today’s statement and review, despite the fact that the deficit reduction plan remains firmly on track.
The headline numbers
The OBR continues to forecast a strong economic outlook for the UK, which remains at the front of the pack of developed economies, even as the global economic outlook has been faltering. Economic growth forecasts remained steady at 2.4% this year and was actually revised up for the next two years, to 2.4% and 2.5% respectively.
Ahead of the statement, there was speculation that the surplus target date of the end of the current parliament would be put back. As it was, the Chancellor used some wiggle room from cheap funding and other adjustments to keep on track, with this year’s deficit of 3.9% steadily reducing until there is a forecast 0.5% surplus for 2019/20. Within this, the Chancellor was pleased to announce £12 billion of capital expenditure and that £12 billion would be saved from the welfare bill, along with a range of cuts to Whitehall departmental budgets coupled with a few headline-grabbing measures.
Give and take
Amid the broad theme of reducing the deficit, there was always going to have to be significantly more taking than giving, with the day-to-day departmental budgets taking much of the pain. More details were provided about plans to boost housing and home ownership, with an intention to increase affordable housing stock by 400,000, although much of this had been signposted previously. Amid the departmental cuts and boosted spending, there were essentially two surprise give-aways and two takeaways.
The biggest surprise was a total U-turn as George Osborne announced he was abandoning the working tax credit cuts that were defeated in the House of Lords and which had attracted considerable criticism from the press and, increasingly, the public at large. Amid ongoing security concerns, the Government also announced protection for police budgets in real terms rather than the cuts that had been expected – a clear crowd pleaser and certainly a boost for society at large.
Offsetting these, the Chancellor went after those perceived as asset-rich and corporations. From next April, a special stamp duty increase of 3% would be applied to second home and buy-to-let purchases, whilst for large corporations an apprenticeship levy of 0.5% of the wage bill will be applied and can be offset by hiring apprentices.
Much of the Autumn Statement and Spending Review was political bluster. In reality there is little that can be done of any magnitude as the Government tries to walk the tightrope between cutting overall spending whilst being seen to be boosting the economy.
From our point of view, the budget was reasonably positive (or at least not particularly negative) in investment terms. There was a nod towards spending, which is good for the economy, but at the same time no increase in debt issuance, which bond markets could have taken badly – particularly as overseas investors are already starting to air concerns over UK assets ahead of the EU referendum.
Our managed portfolios remain fairly cautiously positioned given the global backdrop, although our position on UK equity remains generally neutral, and I see nothing in this budget that would cause us to change that view.