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Friday, November 25, 2016

Autumn Statement

Budgeting for hard times

Anyone hoping for fireworks from the new chancellor Philip Hammond was probably disappointed on Wednesday. Surprises (‘pulling rabbits from hats’), a regular feature of the Autumn Statement at least since Gordon Brown were noticeably absent.

In fact one of the major announcements was the scrapping of the Autumn Statement itself. After the spring Budget next year, and starting in 2017, we’ll have an autumn Budget instead. This makes sense, as tax changes can be announced well in advance of the new tax year. It also means the chancellor gets two goes next year.

Meanwhile the new draft Charter for Budget Responsibility allows some flexibility to support the economy in the short-term. The money this time went to innovation and infrastructure:

  • £23 billion for a new National Productivity Investment Fund
  • £2.3 billion for a new Housing Infrastructure Fund
  • £1.4 billion to provide 40,000 new affordable homes

Of course there were changes to the tax system too. Insurance Premium Tax will increase by 2% next year. Salary sacrifice schemes will be taxed the same as cash income – but pensions, childcare, Cycle to Work and ultra-low emission cars will be exempt. And the Money Purchase Annual Allowance will reduce from £10,000 to £4,000. These are marginal.

But the giveaways were modest too.

For example, the chancellor unveiled a new 3-year NS&I savings bond. The indicative interest rate of 2.2% means someone making the maximum investment of £3,000 would earn… £66 per year. That’s just £3 a month more than if they’d bought NS&I’s Income Bonds. Unlikely to make a difference to those ‘who rely on income from modest savings to get by’.

Other measures included 5p per hour on the National Minimum Wage for 16 to 20 year olds, and reducing the Universal Credit taper from 65% to 63% – worth 2p in the pound for (mostly) workers in receipt of benefits.

With few big-ticket items it’s not surprising the Treasury’s analysis shows no significant impact on households. The very poorest will be about £20 a year better off and the richest about £25 a year worse off.

Impact of Autumn Statement

The bigger picture is somewhat different.

Independent investment economist Peter Stanyer comments:

There was little seasonal cheer in the chancellor’s Autumn Statement, nor in the accompanying analyses by the Office for Budget Responsibility and the Institute for Fiscal Studies. The latter with its projections of stagnating living standards is particularly gloomy.

There are two faint rays of hope. One is that the uncertainty surrounding Brexit means economists know as little about the future as everyone else, and a better-than-forecast outcome is possible. The other is that the last two months have seen long term interest rates (and so the future yield on bond funds) pick up both in the US and the UK. This offers the prospect that the worst may be over for savers.

The immediate impact of rising bond yields, needed for future returns, is a fall in bond prices, which never feels comfortable. In any event, it is unlikely that the good times are about to roll again. Stagnating living standards, muted demand and some pick-up in inflation rule that out.

As often repeated, developments in the US will signal when and whether decent yields are possible for UK investors in bonds and cash.

The big uncertainty is the likely scale and impact of President Trump’s indicated protectionist measures and policies to cut tax and raise government spending, especially on infrastructure. The Republican Party in Congress will have to abandon its earlier resolute defence of ceilings on Federal government debt for Trump’s tax-and-spend policies to have the impact many seem to be expecting.

Boring is usually good – for financial planners. Moving to a single major fiscal event each year, with a cautious chancellor looks likely to deliver that. But in uncertain times, it remains to be seen whether those ‘just about managing’ are tempted by a more radical approach.

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