With less than two months to go until the general election, the Budget was always likely to be a political pantomime – and those expecting entertainment over economics were not disappointed. The drive to support the technology industry became a vehicle for jibes about Ed Miliband’s two-kitchen arrangement, whilst the inheritance tax review – which was somewhat less aggressive than some had forecast – was instead used as a stick to poke Miliband over both his alleged tax affairs and even his position as party leader.
The latest UK growth figures
However, there were a few minutes of genuinely useful content. The Chancellor seized upon the latest growth figures, which showed the UK as one of the strongest developed economies last year, growing at 2.6% and clearly the envy of most of Europe. The independent Office for Budget Responsibility also revised forecasts for 2015 GDP growth, from 2.3% predicted last year up to 2.5%, and followed by 2.3% for the following three years.
These numbers certainly look reasonable on a relative basis. However, this continued outlook for a medium-term moderation in growth chimes closely with our current view that we’re facing a period of secular stagnation, with a structural slowdown in growth, inflation and investment returns. On top of this, given that weak oil prices in aggregate tend to act similarly to global tax cuts, the most recent revisions to growth are less than some people expected.
Austerity appears to be working
In terms of fiscal policy, low interest rates and low inflation have been a clear help to the Treasury, lowering anticipated interest rate charges by an estimated £35 billion compared to a few months ago. Combined with the announced sale of Lloyds shares to the value of £9 billion, this gave the Chancellor a little more wiggle room than was the case last year.
With this extra flexibility Mr Osborne opted to stay the austerity course – paying down national debt as he announced the share of national debt falling a year earlier than expected, starting in 2015/16, with the deficit (effectively the rate of overspend) forecast to turn to a surplus by 2018/19. The overall message was clear – austerity is working, and there’s light at the end of the tunnel.
The introduction of two new ISAs
As well as finding room to pay down debt, there was also scope for some personal tax giveaways. These included the introduction of a new, flexible ISA and a ‘Help to Buy ISA’ for first-time homeowners. The Chancellor also announced further support for charities, transport infrastructure spending for the South West, and more support for the Science and Technology industries. These are all useful for the right people, but relatively limited in terms of overall economic impact.
Taken together this was a political Budget, just as we expected. There were some pre-election giveaways and repeated reminders of how well the UK has performed under austerity – unlike our friends on the continent who didn’t have the benefit of full fiscal union alongside their monetary union.
However, it is questionable how much the Government itself actually influences these matters. For example, the tailwind of cheaper oil is essentially serendipitous for the Government, whilst low yields on government debt is driven more by low inflation and central bank action than by government credibility. As a case in point, it’s currently cheaper to borrow in Spain and Italy than the UK or US.
From an investment perspective, economic strength is generally a good thing regardless of who or what is driving it. But with the upcoming general election and the uncertainty that it brings, the months ahead are likely to be bumpy.