UK Budget Contains No Big Surprises

November 30, 2017

So-called “box office Phil” delivered his first budget since the disastrous election in June. Many of the giveaways were targeted at the disillusioned younger voters whose high turnout at the last election was one of the reasons the Conservatives failed to achieve a majority government. A stamp duty relief of up to £5,000 for first-time buyers and the introduction of the millennial rail card were the most emphasised examples. The Chancellor was hamstrung by weaker expectations for future GDP and productivity growth, however, better than anticipated tax receipts over the last year have lowered the deficit for the current year. For the first time since the financial crisis, there is a possibility that the GDP expectations for the coming years may be too bleak. However, the potential for error in the forecast figures is significantly wider than usual, given the highly uncertain outlook for the ongoing Brexit negotiations.

On Tuesday last week, the Office for National Statistics announced that public sector net borrowing decreased by £4.1bn in the current financial year compared with the same period in 2016. This is the lowest year to date net borrowing figure since 2007. The improvement in public finances has predominately been down to higher tax receipts which are predicted not to grow at the same rate over the coming years. It is therefore likely that government spending will continue to be constrained and those hoping for significant giveaways in 2018 may be disappointed. However, there is increasing pressure on the government to relax spending limits in certain areas, particularly on public sector pay and the NHS. As these forces build combined with the continuing Brexit talks, the likelihood of political disruption remains high.

In equity markets, companies are increasingly being sold off aggressively for disappointing investor expectations. Centrica (the owner of British Gas), was the latest to suffer last week as it released a trading statement for the third quarter on Thursday, falling by 17% on the day. The company has seen a raft of customers leaving as those who took advantage of cheap tariffs last year found better deals elsewhere and a warmer than expected October and November reduced shorter-term consumption. Furthermore, the company’s North American oil and gas business has also been struggling in the lower oil price environment. The final nail in the coffin is the ongoing political opposition to free market utility companies, with the talk of increased regulation and potential price caps coming into force. Traders are finding very little sympathy for out of favour companies who miss short-term expectations; however, this may present significant opportunities for long-term value investors to find companies at very attractive valuations if they have the patience.

Index Open Close Change % Change
FTSE 100 7380 7409 29 0.39%
S&P 500 2578 2602 24 0.93%
Dax 12993 13059 66 0.51%
Cac 40 5319 5390 71 1.33%
Nikkei 225 22396 22550 154 0.69%
UK 10 Year Gilt Yield 1.3 1.25 -0.05 -3.85%