It is very difficult to disaggregate any market reaction to today’s budget from much greater market volatility related to continuing concerns about the banking sector. These were set off by the bankruptcy of Silicon Valley Bank last week, but have since extended to worries about the sustainability of Credit Suisse in its current form. Even so, against this difficult background, Chancellor Jeremy Hunt delivered his second budget, and one that continues to rebuild investor confidence in the UK’s fiscal position.
In terms of the economic message, there was mixed news from the Office for Budget Responsibility, which provides independent forecasts for the UK economy. While allaying fears of a more immediate recession, its outlook for longer-term growth was less rosy. This might well have been the driving force behind the Chancellor’s desire to improve the UK’s potential growth rate with his emphasis on Enterprise, Employment and Education. The more immediate effects will be felt in the first two. Capital allowances on investment will be set at 100% for the next three years, which is positive for industry.
We see no reason for disappointment in today’s statement, and Chancellor Hunt remains a very safe pair of hands.
Perhaps his biggest play was to try to entice some of the seven million working age people who are not currently employed back into labour markets. This could help to reduce inflationary pressures in the economy driven by higher wages, and would certainly help to reduce the upward pressure we have seen on interest rates and mortgage rates. However, it will take some time to take effect. One of the policy changes involved abolishing of the Lifetime Allowance cap on the value of personal pensions, which turned out to be the furriest rabbit pulled from the Chancellor’s hat. Although this was expressly aimed at preventing doctors, in particular, from retiring early, it will be of great benefit to holders of substantial defined contribution pensions who were faced with higher taxation based upon the size of their pots. We note that shares in quoted pension providers and administrators jumped on this news, and this was really the only discernible market outcome from the whole speech.
In summary, we see no reason for disappointment in today’s statement, and Chancellor Hunt remains a very safe pair of hands. Given what else is going in markets, today would have been an unfortunate day to take any risks with the country’s finances. Instead, we can hope for calmer waters to prevail in future, at which time Mr Hunt might be in a position to be somewhat more generous in the run up to the next General Election, which must be held by January 2025 at the latest.
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