No Robin Hood Budget from Osborne

Today’s Budget in the UK was fairly typical–a media frenzy in the build-up, the Commons getting boisterous as the Chancellor announced his tax and spend plans for the next fiscal year and the market reaction was pretty much negligible.

While the immediate impact of the Budget on sterling may only be short-lived, the detail of Osborne’s report is extremely important for the medium-to-long term outlook for the UK economy. Overall his budget delivered a brighter message than previous ones, but also reinforced the struggle ahead to get the UK’s finances back on track.

Below are the key highlights of the report:

Growth:

UK Growth for 2012 was revised slightly higher to 0.8% for this year from 0.7% in November. The 2013 estimate was cut to 2% for 2013, however this could be too optimistic especially as fiscal austerity will continue to bite next year.
The public sector borrowing data for February were much worse than expected with borrowing doubling from Feb 2011, last month the government borrowed GBP15.2bn as tax revenues fell and government spending surged. Thus, although the UK will see its borrowing for 2011/12 come in lower than expected at GBP126bn from GBP127bn originally forecast, it won’t fall as fast as some expected. However, the Chancellor said that the reduction in the deficit to GBP21bn by 2014/15 was on track.

Tax and spend changes:

A “surprise” cut to corporation tax by an extra 1% will come into effect next month. The last Budget outlined a plan to cut corporation tax next month to 25%, so the decline to 24% was an added extra from Osborne and a little sweetner to the business community possible in an attempt to get them hiring again to help bring down the UK’s rising unemployment rate.
However, one sector that won’t benefit from the corporation tax cut is the banking sector, the Chancellor also boosted the Bank levy to come into effect from January to help pay for the cut in corporation tax.
The other major headline was the decline in the top rate of tax. The 50p rate will shrink to 45p from April 2013 for those earning more than GBP150k per year. This is less radical than planned, some had expected a decline to 45p this year, after a government review found that the top rate of tax generated only a third of the revenue it was supposed to.
On the other end of the income scale, Osborne raised the level where income tax will kick in to GBP9,205 this year, eventually rising to GBP10,000. Tax currently kicks in once you earn GBP 8,105.
To help pay for some of this, the government has introduced a new 7% stamp duty rate on sales of properties that are worth more than GBP 2 million that will come into effect from 1800GMT tonight. (the Robin Hood part of the Budget)
He has changed the rules to gradually phase out child benefit if one member of the household earns more than GBP50k per year, if you earn more than GBP60k then you won’t receive any child benefit.
Cigarette duty increases 37p per pack from 1800GMT tonight, but smokers can drown their sorrows as alcohol duty remained flat.

The Chancellor stuck to his fiscal austerity plans and continued to ram home the point that this is a fiscally neutral budget. But to placate the markets and the credit rating agencies (two of which already have the UK on negative outlook) Osborne had to perform a delicate balancing act to try and protect growth without hurting deficit targets. It appears like he has done that this time, although his estimates that closing tax loop holes and the mansion tax (among others) would raise five times as much revenue form the rich as they pay today sounded a bit dubious. Osborne may be ignoring the costs it takes to close tax loopholes…

Overall, we don’t expect the ratings agencies to react to this Budget, especially since there was some good news on the growth front. However, this Budget highlights the mountain that the UK has to climb and today’s public borrowing figures show that the government’s fiscal austerity plan can easily get blown off course.

So what was the market impact? The pound took a while to get going, however it dipped when Osborne announced that the UK would double its exports to key emerging markets. However, the pound is barely moving on domestic fundamentals at the moment, and is instead being jostled about by the direction of the US dollar.

The market isn’t willing to allow the dollar to have an unbridled rally and instead we are seeing pockets of dollar strength, for example against the yen and the Aussie. However, against the pound and the euro it is more mixed as investors weigh up the chances of the Fed, Bank of England and ECB all halting their stimulus policies at the same time.

Hence the major FX crosses are extremely sensitive to any Fed-speak right now and comments from Bernanke today were perceived as hawkish, which is why the dollar gained some traction mid-afternoon London time. Bernanke and US Treasury Secretary Geithner were testifying to US lawmakers on the Eurozone sovereign debt crisis. Bernanke’s comments on high oil prices and the risks they pose to inflation caused the dollar to rise. Basically, the prospect of any upside pressure on inflation in the coming months should rule out QE3 from Bernanke and co. as the risk of more stimulus boosting inflation would be too great.

So as we get to the middle of the week the markets remain in indecisive mode. The UK Budget was mostly felt in the Gilt market, with yields falling further as the market weighs up the prospect of continued austerity, weak growth and a supportive Bank of England after two members voted to boost QE earlier this month although they were out-numbered by the majority who wanted to remain on hold. The Bank levy increase has weighed on UK bank stocks, which is worrying for some stock investors who believe that global markets can only move another leg higher if they are led by the financial sector…

So Budget day has been and gone. The UK is committed to austerity and growth may be higher but still lacklustre this year, hence the fairly muted market reaction.

Source: Forex.com

21.03.2012