David Page, senior economist at AXA Investment Managers shares his views on the 2015 Budget…
“Budget 2015 saw the Chancellor juggle the opposing needs of balancing fiscal rectitude with voter-friendly pre-election measures. A fiscally-neutral Budget with crafted measures to voters will be judged by its impact on the polls over the coming weeks. The medium-term outlook for the finances continue to point to deficit reduction, but sees debt falling one-year earlier than forecast and austerity ending before the end of the next Parliament. Budget 2015 also included modest upgrades to the GDP growth outlook, but a softer interest rate outlook that boosted the public finances outlook. Gilt sales are seen broadly unchanged in 2015-16.
“In broad-terms, the Chancellor managed to achieve these opposing objectives. The Chancellor handed £11billion to households in the form of tax adjustments and measures, including a new boost to the housing market, with a further £2billion in popular cuts in petrol, beer and spirits duties. However, the Chancellor maintained his image of fiscal responsibility with a statement that was fiscally-neutral. Moreover, thanks to an announced £22billion privatisation of government held bank assets in the coming fiscal year, the Chancellor announced that the public debt to GDP ratio would fall one year earlier than previously projected, meeting his original fiscal mandate. Additionally, the Chancellor announced an end to fiscal austerity one year earlier than previously forecast. This allowed the Chancellor to say that austerity is projected to end in the next Parliament. The associated rise in spending for 2019-20 also means spending as a percentage of GDP slow to the same level as in 1999-2000, neutering criticisms that spending was falling to “Depression levels”.
“The Office for Budget Responsibility (OBR) forecast an upward revision in GDP growth to 2.5% in 2015 and 2.3% in 2016, although revised lower its outlook for investment spending reflecting lower business and dwellings investment growth. Our own forecasts are for a modestly faster pace of GDP growth of 2.6% and 2.7% respectively. Elsewhere the OBR forecasts of lower interest rates, both short-term market rates and market gilt rates, boosted the public finances, reducing forecast debt interest payments, but also increasing the net flows to the Exchequer from the Bank of England’s Asset Purchase Facility. The OBR also edged its trend growth outlook higher.
“Gilt issuance was broadly unchanged for this year, but came in markedly below our expectation for 2015-16 at £133.4bn. This reflected lower cash-borrowing this year (£6bn) and next (£11bn), as well as a marked increase in expected National Savings financing. However, estimates of future financing needs beyond 2015-16 were in line with our expectations.
“As we argued before today’s Budget, the medium-term outlook of the current projections is less relevant than usual as it could change markedly after the upcoming election. Instead, this Budget is likely to have more relevance as to its impact on the election in nearly seven weeks’ time. The success or otherwise of today’s Budget will thus be judged by any reaction in the polls over the coming weeks.”
Below is a more detailed summary of today’s Budget.
- In terms of net decisions, this Budget was fiscally neutral, with a modest tightening over the first three years of the forecast, and a loosening in the final two years. The net give-away was £0.4bn over five years.
- Householders were the main beneficiaries. Adjustments to the personal allowance to £10.8k in 2016-17 and £11.0k in 2017-18; the introduction of a savings tax allowance and the ‘help-to-buy’ ISA together constituted a net gain for households of some £11bn. Duties cuts to oil, beer and spirits added a further £2bn.
- The Help-to-buy ISA has echoes of the Help-to-buy mortgage guarantee scheme introduced in Budget 2013, which helped boost sentiment in the housing market as the economy turned from stagnation to recovery. There is a prospect for a similar lift to housing market sentiment now.
- The Chancellor also enacted measures to boost different regions of the UK, including “the Northern Power house” and introduced a number of modest changes for key industries from the creative industries to sciences as well as substantial adjustments to the tax treatment for oil companies to alleviate some pressures on North Sea oil production.
- This additional spending was clawed back with a series of anti-tax avoidance and evasion measures, including a further increase in the Bank Levy, which accounts for £4.4bn.
- A cap on individual’s total lifetime pension pot of £1m (indexed from 2018), down from £1.25m also saves the Treasury nearly £2bn over the next five years.
- The Chancellor also alluded to further measures that may arrive under a future Tory government, including further increases in the personal allowance and a reduction in business rates.
- The OBR increased its GDP forecast for the coming years to 2.5% for 2015 (from 2.4%) and 2.3% in 2016 (from 2.2%).
- AXA IM forecast GDP at 2.6% and 2.7% for 2015 and 2016 respectively.
- Domestic demand was forecast lower. In part this reflects lower investment spending, with business investment forecast lower in 2014 and 2015, but private dwellings investment markedly lower in 2014, 2015 and 2016.
- OBR forecast potential demand growth modestly faster, up 0.1% per annum. The OBR forecast potential output growth accelerating from 2.2% to 2.5% from 2015 to 2019 (from 2.1% to 2.3% in Autumn Statement 2014). The OBR attributes this pick-up to a faster rise in immigration.
- OBR forecasts CPI inflation slowing to 0.2% in 2015 (AXA IM 0.2%) and rebounding gently to 1.2% in 2016 (1.5%) and 1.7% in 2017.
- Public Sector Net Borrowing (PSNB) for 2014-15 close to forecast £90.2bn (vs £91.3bn in AS 14 and £89.7bn AXA IM).
- Relatively subdued GDP in 2016 leads to a higher projected PSNB in 2016-17 (£75.3bn vs £66.7bn AXA-IM). Thereafter, the PSNB profile is close to our expectations £39.4bn in 2016-17 (£36.7bn AXA IM), £12.8bn 2017-18 (£13.3bn), -£5.2bn in 2018-19 (-£2.0bn) and -£7.0bn 2019-20 (-£18.2bn).
- The forecast surplus for the end 2019-20 is £16bn lower than forecast in the Autumn Statement 2014.
- In total, borrowing is forecast £10bn higher from 2014-15 to 2019-20 than in the Autumn Statement and £9bn higher than our own forecasts.
- Public debt is now seen peaking at 80.4% of GDP in 2014-15. This dips to 80.2% in 2015-16, consistent with the Chancellor original fiscal mandates. This reflects the announcement of £22bn of privatisations (£13bn mortgage assets from NRAM and Bradford & Bingley and £9bn from Lloyds Banking Group share sales).
- Finances flattered by interest rate assumptions. By 2019-20, short-term market rates are assumed 50bps lower at 1.90%; longer-term gilt rates are assumed 60bps lower at 2.60%. These assumptions account for a saving of around £4bn alone.
- The softer rate profile will also boost underlying Asset Purchase Facility (APF) inflows to central government over the forecast horizon.
- Reduced squeeze on departmental spending. In real terms the Chancellor now plans to spend an extra £37bn on government departments over the next parliament. This largely reflects an end to austerity in 2018-19 (2019-20 sees spending rise in line with economic activity).
- Total spending to end 2019-20 similar to 2000-01. Total spending as a percentage of GDP projected to fall to 35.9% in 2019-20, equalling the same proportion of spending as 1999-00.
- Gilt issuance for 2014-15 effectively unchanged at £126.1bn (AXA IM £125.9bn). However, this includes a lower than expected central government net cash requirement (CGNCR) of £96.2bn (vs AXA IM £103.8bn) and National Savings income of £18.3bn (AXA IM £15.0bn). This leads to 2014-15 over finance of nearly £10bn.
- Gilt issuance for 2015-16 thus planned much lower than forecast at £133.4bn (AXA IM £157.3bn). This allows for a 2014-15 over finance unwind; lower CGNCR (£78.9bn vs AXA IM forecast of £86bn); and additional National Savings financing of £10.0bn (vs AXA IM assumption of £6.5bn).
· Debt Management Office (DMO) projected gross financing beyond in line with our forecasts. DMO illustrative gross financing £148bn 2016-17 (AXA IM £145bn); £124bn 2017-18 (£122bn); £90bn 2018-19 (£91bn) and £116bn 2019-20 (£102bn).