The first Budget after an election is typically a time for tax increases as short-term popularity slips down the priority list. The previous six post-election budgets each saw net tax rises of GBP 5 billion+ and with the Office for Budget Responsibility’s GDP growth estimates lowered to 1.3%—1.6% p.a. for the next five years and debt as a percentage of GDP peaking this year, this Autumn’s budget was never going to be a straight give-away.
However, with the popularity of May’s government already at rock bottom and intense pressure to push Brexit legislation through a divided Parliament, the Budget was always going to play it safe on unpopular policies. As expected, there were no further U-turns on issues like self-employed national insurance contributions and there was no “pasty tax” equivalent for the opposition to jump on.
More support for “the home owning dream”
As in previous years, housing policy played a key role in the Budget. The Chancellor outlined a path to building ~300,000 homes pa (38% higher than what was delivered in 2016) through easier planning and skills investment, as well as reiterating the GBP 10 billion extension of the Help to Buy programme. There were also positives for urban regeneration businesses such as Morgan Sindall and Countryside Properties, with the topic of estate regeneration being raised.
That said, for the volume house builders, the GBP 44 billion of funding and loans remains largely “carrot”, but the Chancellor did raise the potential “stick” of a review of land banking, highlighting the gap between planning approvals and new housing starts. Importantly, we believe that any changes to incentive structures would be cosmetic only, as house builders are clearly incentivised to build out volume on sites where the demand exists; indeed, such a review could highlight to the government the labour skills shortage that is currently the main constraint on volume growth. In any case, the commitment to greater volumes is a significant positive for the materials suppliers.
A Budget for the Millennials?
One of the recurring themes from this year’s Autumn budget appears to have been a desire to win over younger voters who flocked to Labour in June feeling disenfranchised by intergenerational disparities, with a number of “promises to the next generation”, in particular “good quality, well paid” jobs. The parents of these voters may well have received a free university education, got an early foot on the first rung of the housing ladder and reached retirement with healthy pensions following years of regular pay increases. In sharp contrast, the average Millennial enters the workplace today with GBP 50,000 of student debt1, little hope of independently saving for a deposit and the prospect of a zero-hour contract or a public sector role that will not increase pay in line with inflation. So the elimination of Stamp Duty for first-time buyers up to £300,000 and even a new 26-30 year old railcard could well be a step in the right direction.
However, what was proposed as a Budget for the millennials turned out to be heavy on rhetoric, but light on detail, and some will be disappointed by radio silence on student loans and the public sector pay caps. The trajectory of the National Living Wage also remained unchanged—a relief for retailers and employers of lower-paid staff such as pubs, restaurants and other leisure businesses. Whether or not these changes at the margin are enough to sway opinion among this cohort of voters remains to be seen.
On the other side of the coin, the Budget did not attack the pensions and savings of the core Conservative support base that some had highlighted as an easy target, but this could be a potential target for the future.
Investing in the UK’s future
Today, the UK is ranked just 27th in the world for the quality of its infrastructure2, and there had been hopes that the start of the Brexit process could sharpen the focus on this area. But the Budget proved a bit of a damp squib on the subject of infrastructure projects. That said, there was certainly plenty of rhetoric on investing in productivity in post-Brexit Britain focused on technology. An action plan and GBP 2.5 billion of funding was announced for areas such as electric & autonomous vehicle infrastructure, 5G networks and funding for maths and computer science in schools. These statements may not mean much for stock prices today, but the implied direction of travel could be positive for fledgling UK technology businesses in the future.
Overall, as in previous years, most of the policies announced today had been leaked in advance and the old adage of “no news is good news” rings as true as ever. Perhaps the Chancellor is keeping some of his powder dry for major fiscal stimulus as the Brexit negotiations reach a critical stage.
Anthony Lynch is portfolio manager for JPM UK Equity Core Fund and The Mercantile Investment Trust.
1Source: Institute for Fiscal Studies as at July 2017.
2Source: 2017 CBI/AECOM Infrastructure Survey as at October 2017
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