What Hammond's Budget means for the UK economy

“Seize the opportunities which lie within our grasp”, he hammered out. “Build on Britain’s great global success story. 

“We have no doubts we choose the future; we choose to run towards change, not away from it; to prepare our people to meet the challenges ahead, not to hide from them.”

However, together with all the corresponding documents, the reality is this Budget has painted a problematic picture of the UK’s economic fortunes.

Projections have spelled out trouble in terms of growth, and commentators are in no doubt the Ghost of Brexit Future is haunting the economy.

We have revised down our productivity and GDP forecasts and, despite lower borrowing this year, revised up our forecast for the budget deficit. OBR

Phillip Blond, director of think-tank ResPublica, comments: “Incremental underwhelming interventionism is probably the phrase I would use to describe the Budget.

“In terms of wholesale takeaways - the shocking regression in our growth figures - with a cumulative hit to the UK’s economy of 3 per cent by 2020, bodes ill for public services. 

“They will need a longer bus to chart the costs of Brexit if this continues.”

Growth

The Office for Budget Responsibility’s (OBR’s) fiscal outlook, published alongside the Budget, seems to paint a much gloomier prospect than one might have gleaned from the positive, 'roll-up-our-sleeves and grasp-the-opportunity' Budget speech given by Mr Hammond.

The main line from the OBR was: “We have revised down our productivity and GDP forecasts and, despite lower borrowing this year, revised up our forecast for the budget deficit.”

As a result of lower GDP, investors still hoping for some return on gilts will be disappointed, as the two-year and 10-year gilt yields fell slightly in response to the predicted reduction.

Each fell approximately 2bps to 0.4 per cent and 1.27 per cent on the news, according to figures from Bloomberg.

The reason for the real GDP growth slowdown was, according to the OBR: “Public spending cuts intensify, and Brexit-related uncertainty continues to bear down on activity.”

The OBR’s GDP forecast is now: 

• 1.5 per cent in 2017
• 1.4 per cent in 2018
• 1.3 per cent in 2019
• 1.3 per cent in 2020
• 1.5 per cent in 2021
• 1.6 per cent in 2022

David Page, senior economist at Axa Investment Managers, suggests the OBR has “thrown in the towel” over the growth forecasts.

He notes: “As expected the Chancellor was dealt a blow by the OBR, which revised down both its estimates of GDP and potential GDP growth. The latter was an exercise in outcome over forecast.

“Having forecast a resumption of solid productivity growth since inception, the OBR threw in the towel, today reducing its productivity growth forecast by around 0.5 per cent a year over the forecast horizon.”

What effect did this have on the FTSE 100? “So far, financial market reaction to the Budget has been muted,” says Mr Page. 

Sterling perked up by a paltry 0.4 per cent against the US dollar, while the FTSE 100 fell slightly from 7456.95 at 1pm on 22 November, opening at 7381.05 on 23 November, although by mid-morning today (23 November), it had ticked up to 7400. 

Mr Page adds: “For now the chancellor has managed to pull off a significant increase in spending without breaching his fiscal rules. Financial markets appear to have reserved judgement for now. The chancellor will hope this remains the case.” 

Debt

The UK’s debt mountain does appear to be shrinking gradually, with the deficit continuing to fall; the OBR has forecast the structural deficit to be 1.3 per cent of GDP in 2020-21, giving the government £14.8bn of headroom against its 2 per cent target.

Debt is set to peak at 86.5 per cent of GDP this year, falling gradually to 79.1 per cent in 2022-23; “the first sustained decline in debt in 17 years”, Mr Hammond claimed.

This should perhaps offset fears over growth, which earlier this year saw ratings agency Moody’s knock the UK’s credit rating down again.

The key question is whether this will provide a boost to the economy. To our minds, targeted infrastructure spending is welcome against a background of weak productivity growth. David Page

According to the OBR: “The public finances have performed better than expected. The ONS has revised borrowing in 2016-17 sharply lower, relative to its initial estimate and our March forecast. 

“And the deficit has continued to fall in the first half of 2017-18. We have revised borrowing down by £8.4bn to £49.9bn for the full year, but this is still slightly up on 2016-17 because timing effects boosted receipts last year and will lower them later this year.”

The OBR said despite the deterioration in its underlying forecast, the government has “ensured net debt still falls fractionally as a share of GDP in 2018-19 and by more beyond”.

According to the OBR, the government has done this largely by: 

1)    Announcing fresh sales of RBS shares.
2)    Passing regulations that ease local and central government control over housing associations in England. 

This means the OBR has reduced its borrowing forecast by around £3.75bn a year and reduced the debt forecast by between £67bn and £81bn. 

But all this gloom means there may be a stay of execution on higher interest rates, according to Alix Stewart, fund manager of fixed income at Schroders.

She says: “The OBR’s growth forecasts have been lowered by more than the market expected and the chancellor is being more prudent on the Budget deficit than he might have been. 

“This is resulting in less likelihood that the Bank of England will raise interest rates much more (if at all). In addition, gilt issuance, while a little bit higher than expected from 2019 onwards, isn’t too much to worry about.”

Growth sectors

Those sectors of the UK economy which may be of interest to investors following the Budget, according to Marcus Brookes, head of multi-manager for Schroders, will include technology and infrastructure.

These sectors are set to get a government fillip in the form of an expansion of investment in the National Productivity Investment Fund, launched in November 2016, to provide an additional £23bn of investment over five years. 

In the latest Budget, Mr Hammond pledged to expand this to more than £31bn and run it for an additional year. 

Mr Page states: “The key question is whether this will provide a boost to the economy. To our minds, targeted infrastructure spending is welcome against a background of weak productivity growth.”

Furthermore, UK companies involved in research and development (R&D) also look to be beneficiaries of the government’s pre-Brexit largesse, with a £2.3bn further investment into R&D, and an increase in the main R&D tax credit to 12 per cent.

According to Mr Hammond: “This is taking the first strides towards the ambition of our industrial strategy to drive up R&D investment across the economy to 2.4 per cent of GDP.”

Mr Brookes adds: “Technology investment would be very welcome, as plenty of investors are looking for opportunities in the UK.”

Smaller businesses too will receive a boost, with more than £500m pledged towards a range of initiatives from artificial intelligence to 5G, as well as more than £20bn of investment unlocked to be allocated to UK scale-up businesses.

Chris Gorst, Open Up Challenge Prize lead at Nesta, comments: “As the Budget noted, in 2018 the second phase of Nesta's Open Up Challenge will support groundbreaking fintech innovations for small businesses, powered by new open banking functionality. 

“For many entrepreneurs, the way small business banking currently works is looking increasingly anachronistic. Too often it seems unnecessarily painful, costly and opaque rather than a service that supports them to fulfil their potential.

“The UK is a world leader in fintech and the world leader in open banking, and is ideally placed to transform this market.” 

People power 

Mr Hammond spoke of success in bolstering Britain’s workforce, given there are still 1.4 million people in Britain still out of work. 

He said: “I welcome the OBR forecast there will be another 600,000 people in work by 2022. But I want work to be good quality, and well paid. And regrettably our productivity performance continues to disappoint.”

The OBR revised the outlook for productivity growth and business investment downwards, offsetting any positive gains from more people in work than in 2010.

According to the latest data from the Office for National Statistics (ONS), employment has been trending upwards for both men and women since the 1970s. The year-on-year figures also look rosy:

• For July to September 2017, 75 per cent of people aged from 16 to 64 were in work, up from 74.4 per cent a year earlier. 
• For July to September 2017, there were 32.06 million people in work
• This was 14,000 fewer than for April to June 2017, but 279,000 more than for a year earlier.

Mr Hammond also reiterated pledges to boost the national living wage, which was introduced in 2016.

From April 2018, this is set to rise 4.4 per cent, from £7.50 an hour to £7.83, “handing full-time workers a further £600 pay increase”, Mr Hammond told the house. 

Yet real wages are still falling behind inflation; the average CPI in 2017 is 2.8 per cent, according to the ONS, while the average rate of wage growth is at 2.2 per cent.

For Ms Stewart, the downward revision on GDP and productivity might help to keep inflation at bay. 

She says: “The downgrades of the UK’s productivity forecasts are also likely to offset any inflationary pressures from the increases in the National Living Wage, as will the freezing of duty on alcohol and air fares. Market inflation expectations were a little lower as a result.”

This might come as good news to ordinary investors, who have seen the real value of their cash savings eroded by a combination of low growth and creeping inflation.

Trickle up theory

Yet even with the Budget pledges to boost wages, provide more affordable homes, inject capital into the UK economy and remove stamp duty land tax for first-time buyers on properties worth £300,000 (or £300,000 on properties worth up to £500,000 in London and the south east), this might not be enough to make the pound in people’s pockets reach the parts of the economy that fiscal stimulus cannot.

The OBR’s downgrade of the outlook for the UK economy, not only near term but over the coming years, reflects a growing consensus that both the process and impact of Brexit will have a negative impact on growth. Paras Anand

Tim Walford-Fitzgerald, private client tax partner at HW Fisher & Company, sounds a note of caution: “Such a huge stimulus for the property market – both the immediate cut in Stamp Duty and the long-term largesse for housebuilders – should inject some life into a market that has been weighed down by weakening sentiment and falling real wages.

"But the ‘trickle up’ theory, that firing up first-time buyers is the key to lifting the market as a whole, is far from infallible – and the OBR’s increasingly doom-laden economic outlook could reduce its impact.

"If people’s real wages are falling and property prices remain out of reach, the prospect of saving a few thousand pounds on stamp duty will do little to help would-be buyers save enough for a deposit.”

Likewise, the OBR has treated the stamp duty announcement with caution, saying it will only push house prices up, and not benefit the first-time buyer at all. 

Moreover, the OBR has suggested the move means potential tax receipts to the tune of £560m in 2018 to 2019 – which would otherwise have gone to fund projects such as schools and hospitals – will instead be used to subsidise the private housing market.

In the OBR’s report, it expressed surprise there should be tax giveaways in the face of a weaker economic outlook.

It commented: “Faced with a weaker outlook for the economy and the public finances, and growing pressures on public services following years of cuts, the government has chosen to deliver a significant near-term fiscal giveaway. 

“This adds £2.7bn to borrowing next year and a larger £9.2bn (0.4 per cent of GDP) in 2019-20.”

Brexit

“We have already invested almost £700m in Brexit preparations”, the chancellor said almost joyfully as he stood to deliver. “And today I am setting aside over the next two years another £3bn.

“And I stand ready to allocate further sums if and when needed”, he added, before moving on to say, “this Budget is about much more than Brexit”. 

But Brexit was very much on the minds of market analysts and commentators, especially given the OBR’s focus on it. 

Paras Anand, chief investment officer for equities, Europe, at Fidelity International, declares: “It is rare that the most significant announcements in a Budget are not from the chancellors themselves. 

Financial literacy goes hand in hand with basic numeracy skills and neither have to be daunting. Justin Urquhart Stewart

“Although expected, the OBR’s downgrade of the outlook for the UK economy, not only near term but over the coming years, reflects a growing consensus that both the process and impact of Brexit will have a negative impact on growth.”

Richard Stone, chief executive of the Share Centre, claims the Budget’s lack of real movement on tax or personal investment showed the chancellor had “relatively little room for manoeuvre”.

According to Mr Stone: “He used what room he did have primarily to increase spending along with some tax cuts – notably through freezing fuel duty increase and removing stamp duty for most first-time buyers. 

“He will likely be criticised for finding more funding for Brexit than he has to help solve the challenges faced by those on Universal Credit, and the risks to the UK economy remain heavily centred on the Brexit negotiations.”

Maths

As an aside, Mr Hammond desires the UK to be a hub of mathematical genius, committing £40m to train maths teachers across the country and introducing a maths premium for schools, for every additional pupil who takes A-level or core maths. 

“More maths for everyone. Don’t let anyone say I don’t know how to show the nation a good time,” he quipped.

Yet more than maths is needed if this country is to be able to reduce household and personal debt, start saving more and take more financial responsibility for the future.

Justin Urquhart Stewart, co-founder and head of corporate development for Seven Investment Management, comments: “Given the depressed UK growth projections, it’s hard not to see the Budget’s maths focus through the prism of ‘gosh, we’re going to need some decent mathematicians!’. 

“It’s a sensible approach, but it would be even better if it could be joined up with decent personal finance education. Financial literacy goes hand in hand with basic numeracy skills and neither have to be daunting.”

While not everyone agrees that financial education in schools should be a priority, Mr Urquhart Stewart believes that, like everything else, it is all about how it is delivered. 

He adds: “Making maths relevant and fun has always been the key, and personal finance is the perfect channel. I’ve never met a young person yet who isn’t interested in money.”

simoney.kyriakou@ft.com