Investments  

Experts criticise chancellor’s deficit plan

Experts have criticised the government’s debt-reduction plan in the Autumn Statement as being overly reliant on low interest rates and unsustainable economic trends.

In his statement last week, Mr Osborne revealed the UK must endure further austerity with public spending set to fall to 35.2 per cent of GDP by 2019, which the Office for Budget Responsibility (OBR) expected would “probably be its lowest level in 80 years”.

Mr Osborne’s statement laid out a plan to reverse the government’s deficit – the amount it overspends each year – into an annual surplus of extra cash by 2018/2019. But sharp spending cuts and robust economic growth have been factored in to the chancellor’s forecast.

Article continues after advert

The GDP growth projections from the OBR have been criticised as being too optimistic by Peter Hensman, global strategist at Newton.

He said there was a “danger” in relying on the OBR’s forecasts, which presumed short-term trends would continue.

Mr Hensman cited previous predictions about housing activity as being incorrect and questioned whether employment rates would continue their positive trend.

Simon Ward, chief economist at Henderson Global Investors, said the new OBR forecasts were likely to be as “wrong” as they were in 2010, when the body predicted a surplus by 2015.

He said the government’s “fantasy spending plans” of cutting spending by five percentage points in the next five years “won’t happen”.

Trevor Greetham, director of asset allocation at Fidelity Worldwide Investment, also warned the overhaul to stamp duty meant a continued and dangerous overreliance on the housing market.

“When austerity was at its height early in the parliament the economy flatlined and government debt continued to rise,” he said.

“Recent economic strength in the UK has been less about fiscal rectitude and more about direct measures to stoke up a housing boom. In that sense, cutting stamp duty is one last roll of the dice before the election.

“It isn’t obvious where the offsetting stimulus comes from if housing continues to slow and UK government spending is cut back.”

Orla Garvey, sovereign fund manager at Aviva Investors, agreed all the forecasts from the Autumn Statement “very much hinge on low base rates and low inflation”.

She said investment managers had built a “very strong consensus” around this “one very specific scenario playing out”.

Ms Garvey added many fixed income managers had been hit by not allocating to gilts in 2014 but now there could be a risk of them over-allocating, given broad-brush expectations of low inflation.