Equities  

Budget 2014: ‘Little’ in way of macro policy from Osborne

Experts have said chancellor George Osborne’s Budget lacked any major economic initiatives in spite of the fact the country is still running a budget deficit.

Trevor Greetham, director of asset allocation at Fidelity, said the Budget saw “large upgrades” to GDP forecasts and “large downgrades” to budget deficits but that the announcement lacked further economic initiatives.

“There was little in the way of new macro policy on offer aside from a half-hearted comment on the need to prevent excessively fast house price rises,” he said.

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“The UK economy is growing strongly on the back of explicit government action to boost the housing market and a recovery in confidence in European export markets.

“Getting the consumer to lever up into a red hot housing market doesn’t feel a very sensible strategy for cutting government debt but growth of any kind is better than the relentless austerity and flat-lining of 2010-12.

“Output finally looks likely to regain its pre-crisis peak after more than six years of slump and stagnation.”

Mike Amey, managing director and head of UK portfolios at Pimco, said the main focus was on measures to “encourage personal savings, business investment and exports” and did not focus on the economy.

“The growth and deficit forecasts are both modestly favourable, with the deficit down and growth up,” he said.

“However in macroeconomic terms this Budget will not affect deliberations round at the Bank of England, where a newly constituted Monetary Policy Committee will still be looking towards higher short rates over 2015.”

Neil Williams, group chief economist at Hermes Fund Managers, said fiscal policy was always going to “play second fiddle” to monetary policy.

“However, it contained a few key elements,” he said.

“It’s a warmer economic outlook than the chancellor expected just three months ago, but not hot enough to bring forward that first rate hike.

“The UK’s ‘sugar rush’ recovery is still going, so conventional gilts and equities should welcome the upgrade to growth projections and the fact that Mr Osborne is keeping budget consolidation ahead of fiscally ‘expensive’ give-aways.”

Mr Williams added the “fiscal screw should remain tight” with Mr Osborne aiming to “return it to the black in 2018/19”.

“Better growth means it was inevitable that headline deficits would be lower than planned, allowing Osborne to claim ‘Plan A’ is working,” he said.

“Let’s not get too carried away. First, the deficit is still high. Excluding special items like the transfer of the Royal Mail Pension Plan and quantitative easing profits, the hoped-for 6.6 per cent-of-GDP deficit for 2013/14 will still be the G7’s widest after Japan.

“Second, while the headline deficit falls on better growth, the structural, less growth-sensitive part of the deficit will fall by less, begging further reform and consolidation.”

As a result, the net-debt-to-GDP ratio will not even peak (at 79%) until 2015/16. This is admittedly one year sooner than Osborne predicted this time last year, but still one year later than the coalition had originally mandated.