Economic update on the Autumn Budget 2018

A straight-laced Budget

The Budget was widely considered to be a pivotal point in the career of the Chancellor of the Exchequer, Philip Hammond. However, true to form, the Chancellor delivered a straight-laced Budget. Although there was much talk of an end to austerity, there were few economically meaningful giveaways.

Instead, the focus seemed to be on preserving the Brexit war chest of around £15 billion whilst allowing for some emotive giveaways. To be sure, these items support important social causes, such as more money to schools, supporting air ambulance services and enabling the creation of a Mental Health Crisis service for the NHS.

Providing money to fix potholes and support small businesses and the high street through business tax reliefs, investment allowances and funding to reinvigorate high streets are all useful developments as well. However, whilst the sums are huge at the individual level, they are actually rather limited in terms of national accounts. Overall, there was little here to move the dial, with the Chancellor leaving himself the option of using the Spring Statement to make further fiscal changes if needed.

Changes to forecasts

One piece of good news for most taxpayers was in what didn’t happen rather than what did. With the increased spending for the NHS announced over the summer, there was an assumption that personal tax rates and breaks would be needed to provide funding.

As it was, the Chancellor got a lucky break in the form of significantly higher-than-expected tax receipts, effectively providing the Treasury with an £11 billion windfall, relative to projections. This was primarily driven by the OBR being overly cautious in its estimates, but nonetheless gave the Chancellor the money needed to plug the gap.

UK deficit forecasts

Source: OBR, actual data for 2017/18

The latest estimates show that the deficit is indeed being brought steadily down, and on the current forecast debt-to-GDP will have peaked last fiscal year at 85.0% and begins falling from here on out. However, there is a big caveat, in that these projections assume an orderly outcome from Brexit (be it hard, soft or other). In the event of a disorderly exit, all bets, sadly, will be off.

UK GDP forecasts

Source: OBR

Our view

From a macroeconomic point of view there was little to really move the dial in this Budget. There were some tentative signals to prepare the way for Brexit, both through preserving the £15 billion fiscal headroom and signalling some business-friendly changes (unless you are a global online sales firm), but the magnitudes were limited.

Clearly the revision to the overly cautious tax receipt forecasts gave the Chancellor a much-needed windfall to put towards the extra NHS funding announced earlier in the year, and much was made of the large number of small projects. However, despite the no-doubt valuable projects these funds have gone to supporting, overall this was a treading-water exercise as we head into the first Brexit crunch point.

In terms of our investment strategy, despite the lacklustre economic growth in the UK, we do see some opportunities to access UK-listed firms that are global in nature, and appear undervalued in a market that has become somewhat unloved. More broadly, we continue to favour portfolios that are global diversified as global economic fundamentals remain strong, though we do note some storm clouds potentially gathering on the horizon, which may need to be addressed in the future.