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Summer Budget 2015

Summer Budget 2015

On Wednesday 8th July Chancellor George Osborne delivered the first Conservative budget in almost two decades, signalling an intent to move the United Kingdom from a “low wage, high tax and high welfare spending” country to a “higher wage, lower tax and lower welfare spending” country.

Political and ideological posturing aside, the reality bears little resemblance to the rhetoric. For all the talk of fiscal restraint and austerity, there are decidedly expansionary and fiscally stimulative elements to the budget in terms of both, higher spending and lower taxes.

Higher taxes, higher spending – the new Conservative orthodoxy?

In terms of higher spending, the Chancellor proposes to raise the Resource Departmental Expenditure Limits (the amounts that government departments are allocated to spend) by c. £83billion over the life of this Parliament. He also announced tax cuts of c. £25billion during this Parliament primarily via corporation tax cuts, higher personal income-tax allowance and extending inheritance tax relief to main family residences.

This c. £108billion of fiscal ‘give-aways’ is to be financed through higher taxes, higher borrowing and spending cuts, focused mostly on welfare with some from departmental cuts including a £745million cut in funding for the BBC:

  • tax increases of c. £47billion over this Parliament from increased taxation on dividend income, insurance premiums and vehicle excise duty plus cuts in pension tax relief, earlier corporation tax payments and more robust mitigation of anti-avoidance, evasion and ‘aggressive’ tax planning practises
  • welfare cuts of c. £35billion from a four-year freeze on working-age benefits, cuts in tax credits and universal credit allowances plus forced cuts to house rent via local authorities and housing associations, thereby reducing housing benefits
  • c. £8billion from government departmental spending cuts
  • c. £14billion from additional taxes arising indirectly out of other taxation and spending provisions such as higher income tax, NI and pension contributions from additional public sector workers
  • £3.5billion of extra borrowing on top of the £14.6billion increased borrowing already forecast

The new living wage – a political masterstroke

The biggest surprise in the Budget, however, was the announcement of a new National Living Wage which appears to have been created with the objective of out-flanking the opposition – surpassing, as it does, even the most aggressive proposals for the minimum wage previously mooted by Labour. This is to be paid to the over-25s segment of the workforce from a starting level of £7.20 per hour rising to £9 per hour by 2020 and will offset a £4.5billion cut to tax credits – as part of a larger £12billion cut to welfare spending. Tax credits were introduced in 2003 by then Chancellor Gordon Brown to top up wages for lower-income workers.

The Office for Budget Responsibility (OBR) estimates that this burden of a higher wage on private firms could reduce job creation by 60,000 although the Treasury forecasts the creation of 1million new jobs as a result of other measures. Indeed, some commentators believe the corporation rate cut from 20% to 18% will partially pay for this higher wage bill.

Net Effect

This Budget does not significantly change the direction of travel – the Office for Budget Responsibility still forecasts a modest fiscal surplus by the end of this Parliament. The journey to that destination, however, is considerably changed.

For one, the attainment of a fiscal surplus moves back by a year – from 2018-19 to 2019-20 – and the OBR forecasts total debt higher by £18billion at the end of this Parliament (of which, £3.5billion links directly to provisions in this Budget).

For another, the year-to-year journey has become smoother. The government now must identify further spending cuts of c. £18billion by 2019-20, compared to the earlier forecast of nearly £42billion of new spending cuts by 2018-19. At the time of the March budget, several commentators had cast doubt over the achievability of that ambitious spending cuts target but the new, revised numbers make for a smoother trajectory as well as more realistically achievable targets.

Other Macro-Level Changes To Outlook

The OBR has revised its outlook for GDP growth – down to 2.4% and 2.3% for 2015 and 2016 respectively from earlier forecasts of 2.5% and 2.4%. Inflation is set to remain at very low levels (0.1%) in 2015 before rising to 1.1% in 2016 and gradually back to 2% over the forecast period to 2020.

Investment implications

The Budget presents a more achievable and less volatile path to fiscal consolidation – this is positive for private firms planning long-term investment and capital spending. Budget provisions specifically aimed at raising firms’ investment allowance also enhance the prospects of higher business investment spending and, as a consequence, improvements in labour productivity and growth potential. The raised tax allowances and the National Living Wage potentially raise levels of disposable income and, consequently, levels of discretionary consumption spending over the medium-term. This too is positive for aggregate demand and growth.

There were signs that markets were expecting a more truncated, more aggressive, version of fiscal consolidation with some analysts predicting a net decline in government borrowing and issuance of Gilts. On present OBR forecasts, these expectations have clearly been invalidated. The net effect on investor sentiment, in regards to the Gilts asset class, might therefore be marginally negative. Indeed price action since the Budget speech seems to bear this out – Gilt prices are currently tracking lower and yields on the 10-year Gilt are at their highest in over a week.

Equity markets, however, appear encouraged by the Budget and have erased the week’s losses (of course, recent developments in Greece – which we shall shortly be commenting on – will also likely have played their part in this recovery). But a less fiscally austere budget, marked by higher spending and borrowing, with a smoother, less volatile and more achievable flight-path towards ultimate fiscal surplus by 2019-20 itself makes for a relatively more pro-growth policy backdrop than the pre-election March 2015 Budget – this should be good news for equities over the medium- to longer-term, although this is not guaranteed.

Important Information

Forecasts are opinion only, cannot be guaranteed and should not be relied upon when making investment decisions. The forecast of future performance is not a reliable guide to actual future results. Past performance is not a guide to future performance. Investors may not receive back the full amount originally invested and the value of investments, and the income from them, may fall as well as rise.

No representation, warranty, express or implied, or undertaking is given or made as to the accuracy, reasonableness or completeness of the contents of this document or any opinions or projections expressed herein.

Investment markets and conditions can change rapidly and as such the views expressed should not be taken as statements of fact, nor relied upon when making investment decisions.

Any views expressed within this report are our in house views as at 10th July 2015 and should not be relied upon as fact and could be proved wrong.

The information contained in this webpage has been derived from sources which we consider to be reasonable and appropriate.

This content may not be used, copied, quoted, circulated or otherwise disclosed (in whole or in part) for any other purpose without prior written consent.

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