Today’s Autumn Statement, delivered by the new Chancellor Philip Hammond, as expected saw the announcement of a number of fiscal policies designed to help improve the productivity of the UK’s workforce and to help ordinary working families, or the ‘JAMs’ (just about managing).
A shift in focus
Targeting these social groups, that have not shared in the prosperity of economic growth in recent years, has been a major focus of Theresa May’s administration following the EU referendum and the departure of former Prime Minister David Cameron.
Politically the anti-establishment and anti-globalisation backlash, which was evidently a key theme in the Brexit vote and more recently the US presidential election, has focused the minds of mainstream politicians, particularly in continental Europe ahead of a number of key polls.
From a broader global economic and market backdrop, the abnormal monetary policies implemented by Central banks in the wake of the global financial crisis have driven up equity and bond markets, benefiting asset owners but not providing much real help to underlying economies and those relying on wages for income. Regular readers of our macroeconomic updates will already be aware of our concerns regarding the apparent limitations and side effects of monetary policy, as well as our central house view that the forces of secular stagnation are likely to result in a material shift in policy approach to fresh stimulus via fiscal spending.
Walking the tightrope
The first (and last, after its abolition) Autumn Statement from the new Chancellor was always unlikely to be eye-catching, given his reputation as a steady hand in Westminster and an economic environment where he didn’t have much to give away.
The new Government is attempting to walk the tightrope between being viewed as fiscally creditworthy and ‘open for business’, at a time when the UK economy faces the headwinds of Brexit uncertainty and higher inflation – linked to sterling weakness, and stubbornly high levels of government debt.
Both the UK’s borrowing and overall debt are forecast to rise this year, with the Chancellor’s predecessor George Osborne’s fiscal target of balancing the books by 2020 replaced by a more pragmatic approach of being fiscally flexible, as the UK negotiates its divorce with the European Union. The latest Office for Budget Responsibility (OBR) forecasts estimate that overall public sector net debt will rise to 87.3% of GDP in 2016, before peaking at 90.2% in 2017/18, and then falling slightly in 2019. Despite a reduction in public spending (now 40% of GDP from 45% in 2010), borrowing also remains high at £68 billion in 2016, and is now forecast to reduce more slowly to £20 billion in 2020.
What do the announcements mean in investment terms?
The UK economy has showed signs of resilience and OBR forecasts are likely to be revised given the levels of uncertainty surrounding upcoming Brexit negotiations. That being said, the OBR has forecast that UK economic growth will slow from +2.1% in 2016 to +1.4% in 2017, with lower investment and consumer demand, linked to higher inflation, the major headwinds.
A number of the policies announced by the Chancellor are evidently designed to counter this dip in growth and help those on lower incomes. Fuel duty freezes and increases to personal income tax thresholds are likely to encourage vital consumer demand, while already scheduled cuts to corporation taxes, and investment in infrastructure and innovation are likely to be tailwinds for UK businesses.
With the new Chancellor announcing only top-level spending decisions, the devil as always will be in the detail of each individual policy announcement. However, on the face of it the policy announcements were mainly positive in investment terms, with the Chancellor’s announcement of a £23 billion National Productivity Fund marking the shift towards more fiscal stimulus.
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The value of investments, and the income derived from them, can go down as well as up and you can get back less than you originally invested.
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