Wednesday, 21 March 2012

Over to you, George

Budget day is sunny in London but, returning our gaze to today’s economic news, the clouds seem to be looming once more! Chancellor Osborne’s day got off to a bad start with the public sector net borrowing for February surging to £15.2bn. That’s £7.2bn worse than investors’ median expectation (in fact it was £5bn worse the most pessimistic forecaster could muster). The shortfall was blamed on a sharper than expected rise in year-end departmental spending (largely on benefits) and weaker self assessment income tax receipts (curse those bankers and their miserly bonuses!)

Investors also digested the Monetary Policy Committee (MPC) minutes which revealed that two of the nine members voted for an increase in asset purchases. Rather than a more dovish tone this result reflected the arch doves, Adam Posen and David Miles, maintaining their position (they wanted £75bn of asset purchases in February, £50bn was agreed, so they called for the remaining £25bn in March).

Inflation numbers, released yesterday, arguably supported the rest of the committee’s reluctance. These were a touch higher than forecast due to the familiar tale of higher commodity prices. Historically the approach to such moves has been to see them as a constraint on disposable income, and therefore a “deflationary influence” that coincidentally happens to be inflating prices.

In hope of a little brightness our eyes turned to the Chancellor who has delivered a budget with few surprises.

The thrust of it was designed to enhance competitiveness with corporation tax being cut to 24% from next month. The benefits to companies will be immediate (UK shares outperformed accordingly), while those for the wider economy (through increasing investment and employment) will take time to accrue. They are however symptomatic of a rebalancing of the economy in terms of the shift from consumption to investment, from public sector to private sector, and from finance to a more balanced sector make up.

Furthermore the broadly redistributive tone, aiming to remove low earners from tax and the annual crack down on tax avoidance, should in-turn be positive for consumption although the major change is the accelerated increase in the personal allowance which does not take effect until next year.

The gilt market has strengthened although this probably reflects the weakening of Spanish and Italian government bonds, rather than anything which was announced in Westminster today.

The message is that while the sun shines now, the economy will shine later.


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