Louise Cooper Finance economics markets retail business

Budgetary musings…

Wednesday, March 8th, 2017

Hammond’s budget didn’t contain many changes and those that it did contain were pre-announced.  The Adam Smith Institute called it the “dullest budget in recent history”.  Harsh, but fair although bizarrely dull should not be an insult when it comes to Chancellors (and budgets).

The hard hat, high vis jacket wearing, 5-2 diet, made over action man of an ex Chancellor George Osborne is very different to the Phillip Hammond version, who up to now has been dry and sorry to say, relatively boring.  Although Spreadsheet Phil’s speechwriter has made him considerably more witty – I can’t remember a budget speech that had more jokes than policies, but his did (and some of the jokes were pretty good.)

Osborne was showy.  He enjoyed the political theatre of flourishes and rabbits in hats.  He tinkered endlessly, at the beginning without doing his sums, hence the omnishambles of his early attempts. 

The biggest mistake that Hammond had to rectify was over business rates and that wasn’t even his policy (or his maths).  He comes across far more thoughtful and considered.  He doesn’t want to change policies just for the sake of it, creating headlines and confusion and complexity (and plenty of work for tax accountants).  Hammond is very different – a Chancellor brave enough to be boring. 

Osborne for all his talk of austerity gave away any extra income he had.   Despite political pressure to give the NHS more cash, Hammond didn’t hand over more.  He pointed out that government debt at £1.7tn was equivalent to £62,000 for every household in the country.  And that debt figure will be rising for all the years in this parliament.

The extra cash for social care is funded.  The better borrowing figures were  greeted warmly but not used as an excuse to spend more.  He’s keeping the extra money back for when he may need it if the economy slows.  Very sensible in my opinion.  If you were worried about your job, you wouldn’t book a three week holiday to Disneyland Florida, would you?  You’d make do with a weekend to Paris and may even go to Parc Asterix (much cheaper than Disney and highly recommended by the Cooper Jones family). 

The difference between Osborne and Hammond is also illustrated by their approach to taxing the self-employed.  Only in 2015, Osborne introduced the £5000 tax exemption for dividends.  Hammond has cut it down to £2000 from 2018 (an okay revenue earner, generating £930mn for the treasury by 2020/21)

And Hammond had a very long winded explanation for the fairness of the increase to taxation for the self-employed.  There are currently 4.5mn such workers and according to various calculations they are paying £5-7bn less in total than they would if they were employed.  Chancellor Hammond clearly believes that some of this tax gap is unfair and spent many minutes explaining why.  Osborne never wasted so much time in the House of Commons on explaining his moral thoughts behind a change to taxation.  He was more into theatrical flourishes and bunnies in headwear.

This was a fiscally neutral budget with little changes.

There is a bit of detail in the fiscal detail that caught my eye.  Firstly that the increases in the insurance premium tax is a good revenue earner for the Treasury, generating around £900mn pa.  That cash is then handed back by freezing fuel duty (which costs about £900mn-1bn pa).  So your car insurance goes up but the petrol bill goes down. “He giveth and he taketh away”. 
The business rates relief for small business will cost about £1.5bn pa.  Funded by a restriction on relief for interest charges of about £1bn a year and a reduction in loss relief on corporation tax, which generates £500mn pa.  What did I say about giving and taking away?

And now onto some of the forecasts. 

The first point I wish to make is that for all the talk of Brexit damaging the UK economy, the UK GDP forecasts the UK economy to grow faster than the French economy has grown for 16 years.

UK GDP forecasts:
2017 2%
2018 1.6%
2019 1.7%
2020 1.9%
2021 2%

French GDP:
2001 1.2%
2002 0.4%
2003 0.1%
2004 2%
2005 0.8%
2006 1.6%
2007 1.7%
2008 -0.4%
2009 -3.4%
2010 1.5%
2011 1.6%
2012 -0.3%
2014 -0.2%
2015 0.8%
2016 1.3%

and the Italian figures are even worse (all numbers are from OECD):
2001 0%
2002 -0.3%
2003 0.9%
2004 0.5%
2005 1.7%
2006 1%
2007 -1.7%
2008 -6%
2009 1.4%
2010 0.4%
2011 -3%
2013 -2.9%
2014 -0.8%
2015 0.7%
2016 0.9%

And the creation of the Euro – just before these figures – January 1st 1999.  And the Eurozone crisis hit in 2011.

In the context of these figures and in the context of a US economy that grew 1.6% last year, the OBR’s GDP forecasts for the UK show a remarkably resilient economy. 

The OBR also has CPI peaking at 2.4% in 2017 which is hardly the inflationary scare that media fixated on.  Its also well below the over 5% it got to when the oil price hit $140 in 2011.  And EUROZONE inflation is currently ABOVE that of the UK at 2% versus 1.8% for British CPI.

Also for all the talk of weak Sterling, may I remind you that the pound is far less weak with respect to the Euro. The dollar is strong against all currencies because the Fed is putting interest rates up, whereas the BofE, the ECB (meeting tomorrow with presser) and the BofJ are all still indulging in QE and are therefore a long way from raising rates.  The Fed stopped QE over two years ago in October 2014. 

According to ADP and Moody’s data released today, in February the US economy added an extraordinary 298,000 jobs.  On Friday, the official Non farm payroll data is released together with the unemployment rate.   After today’s ADP data, Friday’s jobs report is expected to be strong and the chances of a 0.25% rate hike from the Fed next week have risen to >90%.  Like him or Loathe him, Trump’s first employment report since arriving in office looks set to be the strongest in years.  There is even some talk of the Fed raising 0.5% but this is pretty unlikely as this would signal to the markets that the Fed is behind the curve. And that is something that central bankers never want to admit to.   

so the dollar is strengthening with the US economy and with fed increasing rates.  Its not just about pound weakness.   

The headline writers have got it slightly wrong with the Pound slumps thanks to budget:

click here

and here

the US jobs report came out at 8.15 EST, or 1.15pm British time.
Although the pound slumped before hand, it fell again after that report.  The pound was not reacting to Spreadsheet Phil (because he didn’t say much).

Over the last few weeks the Pound has fallen from $1.25 to $1.21 currently.  That has coincided with must stronger US data and the probability of a rate hike from the FED next week, rising considerably.   

Speadsheet Phil is not to blame for Sterling weakness.  Blame Trump! 


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