By the time Chancellor Philip Hammond sat down after his 72-minute Budget, investors and savers will have realised there was little in it for them.
Richard Stone, chief executive of The Share Centre, notes: “The Chancellor delivered the longest Budget speech in a decade but had little to say for personal savers and investors.”
Stock markets too were underwhelmed, despite Mr Hammond’s seemingly upbeat economic forecast. Sterling was down slightly against the dollar and the euro, but UK Gilts and UK equities were largely unchanged as the Budget neared its close.
This is despite the fact the Chancellor began his Budget statement with some good news – revealing more positive growth forecasts than were expected.
Azad Zangana, senior European economist at Schroders, says: “The Office for Budget Responsibility updated its forecast in the usual manner, and downgraded real GDP growth for this year from 1.6 per cent to 1.3 per cent.
“The Chancellor skilfully neglected to mention 2018, and instead focused on the upgrades for 2019 to 2021. The inflation forecast was revised higher in almost every year, but the good news for households is that the forecast for wage growth in real terms is positive throughout the forecast.”
Source: Brooks Macdonald and Office for Budget Responsibility
Silvia Dall’Angelo, senior economist at Hermes Investment Management, explains the Chancellor “had some room – albeit limited – to loosen his purse strings”.
“The Office for Budget Responsibility revised down its estimates for public net borrowings by £11.6bn this fiscal year and it also upgraded its estimate for 2019 GDP growth to 1.6 per cent, from 1.3 per cent,” she says.
“As a result, the Chancellor was able to meet the government’s pledge to increase the NHS funding (receiving an extra £84bn over the next five years), while avoiding tax hikes, for now.”
But with a Brexit deal yet to be struck, overall, the government’s fiscal stance will remain “slightly restrictive” over the next few years, Ms Dall’Angelo points out.
Silent on savings
Mr Stone observes the Chancellor was “silent on savings and investment” in his Budget speech.
Closer inspection of the Budget documents reveal few surprises.
While the annual Isa allowance remains unchanged for the 2019 to 2020 tax year, the limits for Junior Isas and Child Trust Funds (CTFs) will increase to £4,368 – “giving slightly more headroom for those who want to save or invest tax-efficiently for children”, Adrian Lowcock, head of personal investing at Willis Owen, adds.
“In the Budget Book it is set out that Isa allowances will stay the same at £20,000 per annum (Jisa and Child Trust Fund allowances will increase in line with CPI), but there is little other mention of pensions, savings or investments,” Mr Stone remarks.
“However, buried deeper within the Budget Book which outlines how the Government will fund its commitments, it is clearly expecting individuals to have more money to save and is making a pitch for those savings which it expects to be successful.”
He continues: “The Government is targeting NS&I (National Savings and Investments) to deliver a sharp increase in the amount of savings it attracts. It will do this, in part, by enhancing premium bonds via a new app, reducing the minimum purchase and enabling more people, not just parents or grandparents, to buy them for children.
“The target for NS&I has been increased by the Chancellor from £6bn to £9bn and an upper range of £12bn – ‘as a result of changing conditions in the savings market’.
“This is the Government competing directly with banks for the pound in savers’ pockets – and believing it can win.”
Infrastructure in the spotlight
Investors in infrastructure funds may have had their interest piqued when Mr Hammond made the following remarks: “Half of the UK’s £600bn infrastructure pipeline will be built and financed by the private sector.
“And in financing public infrastructure, I remain committed to the use of public-private partnership where it delivers value for the taxpayer and genuinely transfers risk to the private sector.
“But there is compelling evidence that the Private Finance Initiative does neither.”
He ended with the declaration: “I can announce that the Government will abolish the use of PFI and PF2 for future projects.”
>In our view, despite the criticisms of PFI contracts, the framework supports a number of aspects of public infrastructure policy.---Joest Bunse
The collapse of the construction company Carillion at the start of the year drew attention to public finance initiatives (PFIs) and the use of public-private partnerships (PPPs) and is likely to be behind this new stance from the Chancellor.
Matthew Yeates, investment manager at Seven Investment Management, agrees with Mr Hammond’s emphasis that Public Private Infrastructure projects can represent a true risk transfer.
"For the listed infrastructure vehicles we own, the performance at the beginning of the year was a reminder of this – the pain of a Carillion break-up and the subsequent costs were born by the private sector and the shareholders of companies in the infrastructure investment company sector – ourselves included," he reasons.
Some infrastructure funds invested in by clients may be PFI-focused but these will not be immediately affected.
As Alex Moore, head of collectives research at Rathbones, explains: “At first glance, if existing contracts are being honoured, then in the short-to-medium term there should be no major reaction. The duration of existing contracts is very long.
“However, if PFI contracts are coming to an end, then it’s not unreasonable to expect some funds to slowly change their strategy. The bottom line is there’s no need for investors to panic."
What infrastructure funding might look like in the future is open to speculation.
“We believe that the government will continue to make use of PPPs in the future, albeit in a different form,” predicts Joest Bunse, associate director at S&P Global Ratings “The main alternative option, funding all infrastructure on the public balance sheet, does not seem to be on the table.
“We consider it likely that any new PPP model will closely mirror key features of the PFI framework.”
He continues: “In our view, despite the criticisms of PFI contracts, the framework supports a number of aspects of public infrastructure policy.
“The PFI framework has been the subject of criticism for several years now, although much of the debate seems to overlook the benefits of risk allocation among its participants.”
The so-called ‘Amazon tax’ did make it into the Budget on October 29, although under the label, UK Digital Services Tax.
The Government has been under pressure to crack down on the amount of tax paid by technology companies in the UK.
In his speech, Mr Hammond sung the praises of digital platforms for having “changed our lives, our society and our economy, mostly for the better”.
But he acknowledged: “They also pose a real challenge for the sustainability and fairness of our tax system.
“The rules have simply not kept pace with changing business models.
“And it’s clearly not sustainable, or fair, that digital platform businesses can generate substantial value in the UK without paying tax here in respect of that business.”
The new tax, which comes into force in April 2020, is expected to raise over £400m a year.
So should investors in technology stocks be worried?
Ben Barringer, equity analyst at Quilter Cheviot, explains: “Most technology companies only break down their revenues into US and non-US, so it’s difficult to get a sense of the exact impact any UK tax could have.
“A sensible estimate of UK exposure for companies like Alphabet (Google), Amazon and Facebook might be between 5 to 10 per cent of revenues, however. So while the UK is more important than many other non-US markets, it still only accounts for a small percentage of their revenues and many technology companies are already domiciled in low tax jurisdictions like Ireland or Luxembourg.”
“Over the short to medium term then, higher tax rates do not appear to be a threat to the technology sector.”
Mr Barringer notes: “As seen in recent days, companies like Alphabet and Amazon continue to generate strong earnings growth and benefit from structural changes in the economy.
“It’s these areas which investors should focus on, rather than changes to tax regimes which are unlikely to have a serious impact on profits for several years.”