News - Economics / markets
Categories: Economics / Markets
Chancellor George Osborne delivered his fourth Budget address this afternoon, cutting his official growth forecast in half, but insisting the UK would avoid a "triple dip" recession.
Osborne also confirmed plans to cut corporation tax to 20%, increase the personal tax free allowance to £10,000 in April 2014 and abolish the stamp duty reserve tax for UK-domiciled funds.
The Chancellor told MPs this year's Budget is "for people who aspire to work hard and get on".
Here, fund managers and economists digest the announcements and give us their verdict.
Azad Zangana, European economist at Schroders:
The Chancellor's fourth budget was fraught with conflict between trying to provide tax cuts to stimulate growth (and satisfy his party's backbenchers), but also to bring down the government's public deficit. Osborne's unapologetic and almost confrontational budget seeks to provide useful tax breaks for low earners and corporates, but will be paid for by a further squeeze on departmental spending.
In comparison to the OBR's forecast from only last December, government debt is now set to peak one year later, and is expected to be £103bn higher in 2017/18 - or 7.5% of GDP. This is yet another fiscal slip from the Chancellor, but it highlights his flexibility with regards his own fiscal rules, and the need to support growth.
The impact overall impact of the policy announcements for the economy is likely to be muted in the near term, but the rebalancing of public spending away from non-investment spending towards investment spending could help provide a boost from 2015. This will largely depend on whether the cuts in non-investment spending will lead to a fall in services being provided, or whether the cuts can be delivered using efficiency savings.
Richard Stevens, fixed income manager at Threadneedle:
The levels of spending were maintained from the Autumn Statement but growth forecasts were reduced meaning that lower receipts than anticipated will lead to larger deficits and a worsening trend in debt/GDP ratio.
A new peak seen at 85.6% of GDP, up from 79.9% only three months ago, should attract the attention of the rating agencies.
The change to the remit of the MPC is not as radical as some had feared. Primacy of inflation target was maintained but the MPC will need to be more explicit as to the trade-offs that are being made between achieving the 2% inflation target and the Government's growth objective.
Additionally the MPC is to consider following the approach used by the Fed in the US of forward rate guidance and the potential use of intermediate thresholds i.e. economic indicators.
Whilst overall spending levels are maintained the Chancellor announced a switch of £3bn pa starting in 2015, away from current spending and into capital investment.
Tony Stenning, head of UK retail at BlackRock:
The revised growth forecasts for the UK and the changing remit of the Bank of England are clear signals that interest rates are likely to remain low for years to come.
This exemplifies the need to be doing as much as possible to help encourage Briton's to save more, particularly for retirement, and to try and close the savings gap. It is well known that we are all living longer and that putting something aside for a comfortable old age has become a necessity.
Hopefully the removal of the stamp duty on UK funds and AIM shares introduced in the 2013 Budget will help Brits to help themselves build a bigger retirement pot.
Paras Anand, head of pan-European equities at Fidelity Worldwide Investment:
Despite the well-leaked downgrade to the UK's economic growth outlook and a deferral of the budget deficit reduction, the content of the Chancellor's 2013 Budget should be incrementally positive for markets.
While characterised as a budget for working families, I would argue that the greater focus was on pushing the UK's relative attractiveness as location for international companies and encouraging the development of small businesses, especially those with high level of intellectual property.
Reduction of corporation tax to the 20% level, 10% R&D tax credit and more favourable tax treatment for employers granting ownership to employees are all positive steps.
Nancy Curtin, CIO of Close Brothers Asset Management:
Faced with a flat lining economy, simmering eurozone tensions and an election just two years away, Osborne was never going to have many options on the table. He has been wedded so long and so vocally to his plan A of fiscal tightening and austerity that any major deviation would blight his political future.
Although this fiscally neutral budget had some interesting nods to a rudimentary Plan B - fore-shadowed steps to encourage the development of Britain's shale gas reserves, and the reduction and simplification of the corporate tax regime should all play well in the City - it was really more about monetary easing.
Governor Carney's new flexible remit paves the way for more QE and a flexible approach to inflation targeting clearly modelled on the path the US Fed has successfully taken to boost its economy. However, this is not America, and the numbers are not good (0.6 % growth in 2013/4) so whether we can avoid rampant inflation and, more importantly, a further credit downgrade remains to be seen.
Mike Amey, managing director & head of sterling portfolios at PIMCO:
This is a fiscally neutral Budget, with the onus still on monetary policy to provide cyclical stimulus and support growth. The forecast end date for deficit reduction has been pushed back further as growth continues to undershoot, and it is unlikely we have seen the last of this.
The culmination of the recent debate on changes to the remit at the Bank of England seem to have concluded that the existing arrangements provide sufficient flexibility for the Bank of England to support growth, and tolerate the inflation overshoot.
The policy framework today looks very much as it did yesterday. With the policy framework unchanged and growth likely to disappoint, we will see more QE this year irrespective of the upcoming debate on "the power of forward guidance". For now QE will remain focused on adding to the Bank of England's stock of gilts.
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