Andrew Milligan, Head of Global Strategy at Standard Life Investments, discusses the Budget 2017 and what it means for you.
As the Budget speech is an hour long, and accompanied by hundreds of explanatory pages from the Treasury, it’s worth standing back and asking some questions to put all the newspaper, radio or TV commentary into perspective.
No. Sterling, the FTSE® 100 Index and gilt yields hardly moved on the statement, although house builder share prices gyrated a little. That suggests one of two things. Either all the news was already priced in, reflecting previous statements from the independent Office for Budget Responsibility (OBR) and other official ‘leaks’ over recent days. Or that other matters, say trends in corporate profits or the success of December’s EU Brexit Summit, are more important for the markets.
Only marginally. There’s more borrowing (an extra £52 billion cumulatively by 2022), which opens the door for a series of spending initiatives on a wide range of areas. The most notable is housing with over £40 billion of assistance, loans and guarantees in various forms to improve the balance of supply versus demand.
However, at the margin the Treasury is only indicating less fiscal tightening – certainly not a change of view which would materially affect economists’ forecasts. Looking ahead, of course the Chancellor retains his adherence to his key fiscal rules – to mis-quote St Augustine ‘make me pure but not yet’.
The most important announcement about economic growth didn’t come from the Chancellor but from the independent OBR, which lowered its growth forecasts for the UK for every year until 2021. As low as 1.3% in some years.
It has finally bitten the bullet and accepted that productivity growth is materially weaker. The weakening started before but was enhanced by the financial crisis and subsequent issues such as an ageing population and less migration. One statistic sums this up perfectly: real household disposable income is predicted to grow by just 0.3% a year up to and including 2022.
This comes against the background of a solid upturn in the global economy, and the fastest rate of growth in Europe, the UK’s largest trading partner, since the financial crisis. Over time, the implications for the profitability of companies with a purely domestic focus will build up. The Chancellor has indeed responded with a series of measures to try and improve education and skills, training and innovation. Each in turn is welcome but collectively the sums involved are unlikely to make a major difference to the productivity outlook.
Something that perhaps should have been covered is infrastructure. This stands out among a number of categories, such as defence, security and social care, particularly as it’s well known that the UK has slipped down the global rankings. The World Economic Forum ranked the UK 28th in the world last year, down from 16th in 2006.
There were only limited announcements on infrastructure, again each was individually welcome such as a fund for local transport initiatives, but collectively not enough to move the dial.
One area which Aberdeen Standard Investments has proposed, for example, is changes to the regulation of insurance companies, which could open the way, for much more spending in this area.
Budgets should be seen as political theatre, allowing the government to set the mood music, if only for a brief period of time. Eventually other events, like Brexit negotiations, will dominate the newspapers again. In that sense, the Chancellor gave a lot of ammunition to his party, protecting the flank from attack on a series of issues such as universal credit, NHS spending, business rates and support for millennials to name a few.
The Chancellor's room for manoeuvre was always limited though. He was restricted by the state of public finances, historically slow growth and the lack of a large parliamentary majority, all against the background of Brexit, the largest legislative exercise for the UK since World War Two.
This helps explain why all Chancellors like to keep a few surprises up their sleeves, despite the flurry of newspaper reports and official leaks in recent days. On this occasion, we saw an unusual outcome – the statement ended with a stamp duty cut for first time buyers. It’s a rare thing to see housing tax change take priority over personal or corporate tax announcements.
The good news is that it was a boring Budget. Yes, there were some changes, for example to Enterprise Investment Scheme rules, but otherwise the various pension allowances and ISA rules saw minimal reform.
After years of changes, no news is good news. All we have to do now is consider how we build a good portfolio which will take advantage of strong profits growth in many parts of the world, while avoiding the political, commercial and economic risks that are clearly present.
The information in this blog or any response to comments should not be regarded as financial advice.
Please remember that the value of your investment can go down as well as up, and may be worth less than you paid in. Information is based on our understanding in November 2017.
Andrew Milligan is Head of Global Strategy at Standard Life Investments