The end of austerity?

Callum Abbot, portfolio manager for the JPM UK Equity Plus Fund and the JPM UK Equity Core Fund, discusses yesterday’s budget announcement.

Go to the profile of Callum Abbot
Oct 30, 2018
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The chancellor opened up his budget with the promise that the era of austerity was finally coming to an end. He laid the blame for the lean years squarely with the previous Labour Party and talked up the Conservative Party’s shrewd fiscal management as the reason austerity could end.

Mr Hammond cited bumper tax receipts, economic growth forecast upgrades, multi decade low unemployment and wage growth at its highest in nearly a decade. The net result of fiscal caution and improved growth was borrowing was coming down and public finances were improving.

The reality is the chancellor had little choice but to announce the end to austerity after Prime Minister May announced it at the Conservative Party conference. The Tories have been forced to react to the fiscally loose Labour Party’s growing popularity. 

The chancellor’s comments on Brexit were tempered to avoid riling the Brexiteers at this delicate point in negotiations, however, he has hedged his bets.

He set aside an extra £500m for preparations for leaving the EU and, if it turns into a hard Brexit, the next Spring Statement could become a full budget. If a good deal is secured the chancellor promised a double deal dividend in the form of less uncertainty and a release of fiscal head room that is currently being held in reserve. If Brexit goes bad the implication is the end of austerity will have to wait – something that is politically unpalatable for many Conservative MP’s that have Labour opposition breathing down their neck.

The bulk of increased spending will go to the NHS but there were commitments to spending on defence, education and infrastructure. All welcome but unlikely to be hugely impactful on the equity market. The £38bn commitment to infrastructure funding may benefit some of the contractors. The end to private finance initiative (PFI) schemes is perhaps unsurprising, but these have been out of fashion for some time and other private contracts will continue to be used.

Help to Buy was not discussed but the Red Book revealed it will be extended two years to March 2023 and from 2021-2023 it be limited to first time buyers. The other announcements on house building look unlikely to hugely shake up the market.

A freeze on spirits, beer and cider duties may have a marginal impact on the likes of Diageo but the UK is only one market of a global behemoth. The tobacco duty escalator of inflation plus 2% continues and is unlikely to surprise many or impact the big tobacco names.

An increase in remote gaming revenues to 21% from 15% to be implemented in October 2019 to coincide with when the fixed odds betting terminal (FOBT) maximum bet will come down to £2, which this duty increase is designed to offset. This had been expected by companies and analysts but looks slightly less punitive than expectations.

The announcement of £670m support for the high street will be welcome for retailers, but is unlikely to be able to reverse the pain of the structural trends that high street retailers face as shoppers move online. The help has been targeted at smaller retailers but will do nothing to help the larger chains, some of whom are struggling in the current environment and are the ones who pay the biggest share of business rates. 

It will be interesting to see how the chancellors Digital Services Tax on global tech giants is enforced and whether it can successfully raise tax revenue from companies that have been tricky to pin down for tax revenues. It is also not coming into place until 2020 and is unlikely to have any impact in the short term.

The National Living Wage will increase by 4.9% in April 2019, which may increase cost pressures for some employers of low income workers but this twinned with the improvement in wage growth may prove supportive of general retailers if people have more money in their pockets.

Perhaps the biggest news to come out of the budget was the announcement that personal allowance would be increasing to £12,500 and the higher rate tax threshold to £50,000 from April 2019. The former is a year earlier than expected.

All in all, a fairly unexciting budget in terms of new announcements but politically savvy. The equities markets are more focused on larger macro events and the budget is unlikely to have any major impact on general investor sentiment.

Callum Abbot is a portfolio manager for the JPM UK Equity Plus Fund and the JPM UK Equity Core Fund.

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Go to the profile of Callum Abbot

Callum Abbot

Portfolio Manager, JPM UK Equity Plus Fund , J.P. Morgan Asset Management

1 Comments

Go to the profile of Harry Katz
Harry Katz about 1 month ago

End of austerity? Are you kidding?  Apart from the hurdles already mentioned total debt last year was £5.1 trillion with households accounting for £1.9 Trillion. By 2023 (according to PWC) total debt will have risen to £6.7 trillion with households accounting for £2.6 trillion. (Larger than Government debt!)

Last year debt as a proportion of GDP was around 252%.

Unsecured debt is balooning at around £556 billion. Student loans (most of which won't be repaid) amount to 23% of mortgage lending at around £125 billion. There are now more than 2.3 million car finance deals. People are renting cat=rs like they used to rent TVs.

The choice is simple - either a prolonged does of real austerity, or bankruptcy and if Corbyn gets in and carries out his manifesto then bankruptcy looks like a slam dunk.