THE Chancellor delivered his Budget last Wednesday, which was intended to be pro-growth after his focus last year on spending cuts and reducing public debt.
After the Office for Budget Responsibility downgraded its forecast for economic growth in the UK this year to 1.7% from November’s forecast of 2.1%, perhaps it needed to be. This was a bigger downward revision than City analysts had been expecting – the consensus figure was 1.9%.
Mr Osborne certainly delivered some pro-growth surprises, most notable of which was a 2% reduction in corporation tax, not the 1% that had been anticipated. This was the highest-profile measure designed to stimulate business investment and, together with other tax concessions, incentives and allowances for small businesses, it was designed to send out the message that Britain is open for business.
However, there was little in the Budget for banks, because of the bank levy, and oil companies, due to the “fair fuel stabiliser”.
How was the Budget received? There was little reaction in the bond market, which was perhaps one of Mr Osborne’s primary areas of concern.
Central to his economic model was the maintenance of the UK’s high credit rating, which had come under threat due to increases in public sector debt. It appears the market does not see this as a concern.
In equity markets, it was less positive for banks and oil companies.
However, for smaller companies it was very positive and this could be critical to the UK’s potential to deliver economic growth as the large multinationals of the FTSE 100 employ a mere 6% of the UK workforce. Small companies have the potential to grow faster due to their size and many have suffered as the banks have been reticent to lend and, where they have, the interest rates charged have been high.
The message that the UK is committed to growth is one that will resonate positively with markets. The stock market is a discounting mechanism where future earnings and growth are factored into current asset valuations and as a result, markets loathe uncertainty. However, whether the Chancellor’s budget delivers growth is another matter and there are several headwinds to this, such as rising inflation and the effective “tax” caused by the high oil price.
Investors may be encouraged by the Budget, but geopolitical issues like the revolution in Libya and its effect on the oil price will also have an impact on economic growth and stock markets. The Budget may prompt investors to consider investing in smaller companies but this is an area of the market that is less well-researched by analysts. Therefore, care should be taken, individual circumstances considered and appropriate advice sought before decisions are taken.
