The Last Budget: pretty much everything we already knew
The last budget, before the UK is expected to trigger Article 50, was expected to be fairly uneventful and it lived up to the ‘hype’. Philip Hammond, the UK Chancellor, said very little in the 55 minutes in which he outlined his budget proposal.
He began his speech on a positive note by detailing that the British economy had grown faster than the US, Japan and France. In fact, amongst the major developed economies, the UK came only second to Germany. Employment is at a record high and unemployment is at an 11 year low with Northern Ireland experiencing the highest wage growth. The Chancellor also announced that growth forecasts for 2017 had been upgraded from 1.4% to 2.0% although forecasts for the next few years are expected to be lower with 2021 being expected to be the next point that growth would hit this level. Inflation was expected to rise from 2.3% to 2.4% in 2017/2018 before falling in subsequent years. Government borrowing was £16.4bn lower than forecast and was expected to reach 0.7% in 2021/2022. Despite the positive start to the budget announcement, there were areas of weakness which included productivity which remains stubbornly low. Growth in productivity was, however, strongest in Scotland and the North East. Although there was little mention of Brexit, there were references to the shape of the country in the future and that the government would do what was necessary to support the economy.
There were no increases in duties on fuel duty, alcohol or tobacco on top of those which have already been announced and tax on dividends, received on investments held in ISAs, will remain tax free. There will, however, be a significant reduction in the tax free allowance on dividends received on investments outside such wrappers, moving down £3,000 to an overall allowance of £2,000.
Other initiatives to increase tax revenue focused on ensuring that tax avoidance, evasion and non-compliance was minimalized. The government has raised £140bn in tax revenue since 2010, by focusing on such issues, and announced these measures will raise a further £820m. Mobile roaming charges outside of the EU would see the addition of VAT in line with global standards which may prove a headwind for mobile telecommunications companies who have already seen headwinds relating to EU roaming charges.
Despite the top 1% of income tax payers paying 27% of all income tax, there was a controversial plan to increase National Insurance contributions for those that were self-employed. This announcement may see pushback from other parties, as well as from some in the ranks of the Conservative party. No changes were announced for those employed. The personal tax-free allowance was also increased by over 8.5% to £12,500.
There were also notable announcements regarding health & social care, education, housing and women.
The UK Chancellor made several comments focused on ensuring Britain was a global player and was an attractive place for companies to base their businesses as well as a place where entrepreneurs can thrive. In line with agreed funding formulas, he also announced £250m extra funding for the Scottish government, £200m for the Welsh government and £120m for the Northern Ireland executive. This was made on the back of a statement that the UK was better of together rather than splitting as a result of the UK referendum.
He ended on an upbeat note stating that the government ‘reaffirmed its commitment to invest in ‘Britain’s future’ and was ‘confident in our strengths and clear in our determination to build a stronger, fairer and better Britain’.
So how did the equity markets react? Well the budget was anticipated to be pretty much a non-event. Although the plans regarding National Insurance contributions for the self-employed are controversial, there is unlikely to be any impact on listed companies. There was clear rhetoric around making Britain an attractive global player but little substance as to how this budget would support this.
The FTSE 100 ended the day marginally ahead but lost some ground in early trading the following day. The FTSE All-Share followed a similar path. Both indices, however, started to make up some of that lost ground. Sterling initially saw further weakness but we have started to see this reverse as well.
Generally, there was nothing to cause huge concern for UK equity investors and, compared to the political events of last year, investors appear more immune to the impact of political statements. The economy still seems in good shape, the weakness in the currency will support businesses with overseas earnings and the government will do what it can to support the economy through the path to Brexit. Pretty much everything we already knew.
Andy Robbens is a Client Portfolio Manager at J.P. Morgan Asset Management. Read more about J.P. Morgan Asset Management’s UK equity fund range: UK Advisers
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