The Conservative government has just completed its first year of being in sole power. While the past 12 months have seen numerous reforms in various sectors in the UK, there have been challenges too, especially with the recent resignation of former secretary of state for work and pensions Iain Duncan Smith and the split in the Tory party over the EU referendum.
Uncertainty in global markets and challenges on the domestic front, such as the EU referendum, have kept the UK economy on its toes. The Office for Budget Responsibility (OBR) recently cut forecasts for the economy. It had previously forecast growth at 2.4 per cent this year, but has now revised that to 2 per cent.
However, the government has fallen short of meeting some of its economic targets, deficit reduction being one. The original deficit target was £73.5bn for the year, but this was revised down to £72.2bn by the OBR. Recent reports from the Office for National Statistics (ONS) show the UK budget deficit narrowed in February on higher receipts. During his budget speech in March, George Osborne admitted missing the fiscal target, but added that he expects the UK to clear its deficit by 2020, despite slower than expected growth.
David Stubbs, global market strategist at JP Morgan, says this has resulted in some uncertainty in financial markets. “There has been somewhat of a loss of momentum,” he says. “You still have tepid growth conditions; a lot of financial market uncertainty. Then of course, the Brexit debate as well, which at the margin has been hurting some of the sentiment indicators in the UK. It is a question that remains important with the UK economy.”
He adds that we have seen considerable turbulence in the oil industry, with low oil prices impacting on the UK economy and remaining a cause for concern. However, Mr Stubbs believes that despite a weaker growth expectation for the next year or so, the UK is still in a fairly decent place compared with a lot of other countries in Europe.
PWC’s UK Economic Outlook from March 2016 reaffirms that view: “The UK recovery since mid–2009 has been relatively slow by historical standards, but still faster than most other G7 economies over this period.” The report further states that while UK GDP growth slowed a little in 2015, consumer growth remains relatively strong. Chart 1, using data from the UK government, shows the predicted change in the UK GDP forecast from 2014 to 2020.
Business investment has rebounded reasonably strongly since mid-2009 after being hit hard by the recession, according to PWC. However, as per preliminary ONS estimates, it did falter in late 2015. Analysts have attributed this decline to concerns about the EU referendum and debate over the implications of potential outcomes.
“I think what business people look for is continuity and stability and the notion that we are moving in the right direction,” says Andrew Sentance, former Bank of England monetary policy committee (MPC) member and senior economic adviser at PWC. “In terms of the big issues such as getting the deficit down, we have got the continuity and stability. There are debates about whether George Osborne is going to meet his targets. Well, he is certainly moving towards those targets.”
He adds that although we are currently under a cloud of uncertainty over the referendum, hopefully that will be resolved in June. “I think if it is resolved positively for remaining in the EU, that could bounce back business confidence and financial confidence, and the position of the pound,” Mr Sentance says.
The current government has received a lot of criticism for its failure to meet targets. The recent resignation of Mr Duncan Smith has also highlighted the ongoing rift among members in the Conservative party. In his attack on his own government, Mr Duncan Smith said that the Tory party is hitting the poorest in order to meet deficit targets. He stated that he was unable to accept the government’s planned cuts to disability benefits, despite previously being the public face of the policy.
However, Mr Duncan Smith’s resignation was immediately criticised by pensions minister Ros Altmann, further exposing the rifts in the party. Accusing Mr Duncan Smith of being motivated by a desire to do maximum damage to the party, Ms Altmann suggested the resignation was over the EU referendum campaign rather than a protest about disability benefits cut.
Referendum concerns
On June 23, the UK will vote to stay in or leave the EU. While the Tories are divided in their views on the EU referendum debate, Prime Minister David Cameron has been supporting the campaign for the UK to stay in the EU. As many as 150 Tory MPs are believed to be backing Brexit, meaning that the parliamentary party of 331 MPs is split almost in half.
In a recent poll conducted by YouGov, 40 per cent of the electorate wanted to remain in the UK, 37 per cent wanted to leave and the remaining 23 per cent did not know or would not vote. The poll conducted in March also highlights that people often decide how to vote much later in referendums than in general elections, and referendum polling is often far more volatile than general election polling.
The YouGov posed several questions, the results of which are shown in Charts 2 and 3. On the topic of whether Britain would be economically better off or worse off if it left the EU, 31 per cent said it would be worse off, while only 23 per cent believed it would be better off.
The uncertainty has had an impact on both the economy and politics. Economically, the risk of uncertainty along with the slowdown of the global economy has hit the pound, making it weaker than it was last year.
“We think this is going to continue until the June 23 referendum,” says Mr Stubbs. “I think there will be significant volatility in sterling and that will probably feed over into some of the credit markets as well. Then who knows what happens after that referendum?”
The Bank of England has warned that the vote on the UK’s membership of the EU poses risks to economic growth. Concerns about a possible Brexit have had an impact on the pound and are also likely to delay some spending decisions and depress growth of aggregate demand in the near term, the bank said.
UK retail market
The past year has seen a number of changes in the UK personal finance market; 2015 was also the year of pensions freedoms. According to the new rules, people can withdraw their entire pension from age 55, with the first 25 per cent tax free and the remaining 75 per cent taxed at the saver’s marginal rate.
While the move was welcomed by many retirees, some of which decided to use their pots for such things as kitchen renovations and paying off debts, frequent changes in the pensions market have been a concern for advisers.
“I am worried about further pensions changes going forwards,” says Rowena Griffiths, a chartered financial planner at London-based Female Financial Management. “I think pension freedoms should make pensions more attractive to the younger generation, but I think the pace of change is too slow. I struggle to understand some of the current issues, such as the tapering of the annual allowance for high earners.”
She says her fear is that confused clients will not buy into pensions, asking, “Whatever happened to ‘pensions simplification’?”
Housing is another area where the government has been working hard to get everyone who wants to buy a home on to the property ladder, announcing initiatives including the Help-to-Buy Isa last year. In its Autumn Statement, the government doubled the housing budget to £2bn a year along with a promise to build 400,000 more affordable homes.
Furthermore, the government announced a 3 per cent surchange on stamp duty on the purchase of additional properties such as buy-to-lets and second homes.
However, advisers believe a lot more needs to be done to enable more people to buy their own homes. “There is such a massive housing drought throughout the country, which is pushing up prices artificially higher,” says Nick Green, a Coventry-based financial adviser. “Without some large-scale house-building there is no end to the shortage, as sellers will not move out of their property since there is nothing to move to.”
Looking ahead
While a lot is dependent on the result of the EU referendum, analysts expect the government to focus on areas such as infrastructure and education to ensure other drivers of the economy are progressing.
“I would highlight three main areas,” says Mr Sentance. “One is better transport. I support the need for better transport links, but we need to make sure the transport infrastructure is improving not just in the longer term, but also in the short-term with, perhaps, stronger focus on delivering smaller projects that help in local areas.”
The second thing he thinks the government should focus on is educational skills. “Let us make sure all the initiatives it is talking about – such as academy schools, and apprenticeships – are well-managed.”
Finally, Mr Sentance believes that for a long time the government has lacked a major approach to reforming taxes. “If you look at George Osborne’s latest budget, it is all bells and whistles and taking with one hand and giving with another. There is far too much tinkering with the tax system and not much streamlining and reforming, so I think George Osborne has the opportunity post the EU referendum vote to make some significant reforms to the tax system.”
The past year has seen missed economic targets and controversies about the working of the party, exposing an ongoing rift. But, right now, the government needs to deal with a referendum vote. The outcome of that could set the tone for the rest of the parliament.
“My advice to David Cameron is to stop scaremongering about the Brexit. Let us have a balanced argument for once,” Ms Griffiths says.
