The really big message from the UK Budget (that people are not talking about)

‘A budget tells us what we can’t afford, but it doesn’t keep us from buying it’ – William Feather

Do you know how to judge whether the history books will be kind on the Budget statement given on Wednesday by the Chancellor of the Exchequer?

All you need to do is look at the newspaper headlines the next day and see – natural political biases adjusting – what the average view was.

On this basis the Chancellor of the Exchequer should rest happily with the knowledge that the March 2017 Budget will be perceived in the fullness of time as one of the better financial statements in recent years.

I write this fully aware of the opprobrium cascading across the newswires from the self-employed to some of the measures announced, a pain I will be sharing from the next tax year unless the government perform a u-turn worthy of the dexterity of a Formula One driver.

This does not seem to be a particularly incisive way to encourage entrepreneurship and hence employment and wealth creation. At least corporation tax is going down…

No, the really big message from the UK Budget that not enough people are talking about is all about economic growth. Now after the National Insurance tax evolutions one of the other headlines picked up was the uplifting of 2017 UK economic growth forecasts by the independent Office for Budgetary Responsibility (OBR) who provide many of the Chancellor’s big picture statistics.

Back in November at the time of the Autumn Statement growth of 1.4% for the UK economy in 2017 was anticipated but in the Budget statement this had been hiked to 2%.

Well that sounds like good news…and another one in the eye for ‘the Brexit vote is a disaster’ mob. However…the economic growth numbers for 2018, 2019 and 2020 were all revised down to 1.6%, 1.7% and 1.9% respectively.

Now you can look at this in two ways. The first – and more pessimistic interpretation – would be that this coincides with the actual Brexit divorce negotiation and immediate aftermath period when uncertainty is undoubtedly going to be very high.

The second – and more optimistic insight – would acknowledge this but also observe that whilst such growth levels are below average compared to the totality of the last generation at least the UK economy will not be in recession.

This is why the March 2017 Budget will be treated well by the history books. Whilst all the headlines have been made up on debates on tax changes that do not directly impact the majority – and which few understand fully in any case – the underlying economic growth message has this year improved in terms of growth hopes. It is a classic steady-as-she-goes Budget that over time will be viewed as prudent. In short the day of reckoning has been postponed.

So why are the growth numbers up then for this year? Well you can do anything with statistics.

The 2016 anticipated growth level was pulled down a little, the Pound’s continued weakness helps out a bit and our biggest trading partners around the world – including with delicious irony the Eurozone – are all also growing a bit faster. And also frankly all numbers are subject to potential revision even though I think the numbers projected for the rest of the decade and beyond are about correct.

And how about those pesky growth downgrades to growth after this year? That’s the insiders at the OBR trying to tell you that they believe the government will strike a soft Brexit deal.

Now this may be based on hope or underlying views but if the Chancellor wants to stand up in a year or two and not look like a fool something other than a hard Brexit is the prescribed medicine. Whilst the government may have caused some issues at the margin for entrepreneurs with their National Insurance evolution this pales into a nothing compared to the short-term impact on jobs, profits and growth from ripping up the current pan-European trade legislation.

2018 and 2019 are going to be all about the uncertainty about the extent of the Brexit impact. It would be easy for economic growth to materially pause with that backdrop. If the OBR and the Chancellor really believe in their published numbers then a compromise awaits.

In short this Budget’s economic growth assumptions – and hence the tax and spending underpinnings – are all based on a soft Brexit. This sounds reasonable to me and eminently sensible. Now it is just a question of negotiating it…and selling it to the electorate.

Now what do you – as a Brexit referendum voter – think?

Chris Bailey has over 20 years of investment industry experience at long-only and long-short institutions as a global multi-asset fund manager, strategist/macro thinker and, in the earlier part of his career, as a securities and fund analyst.

In 2013 he founded Financial Orbit focusing on daily macroeconomic comment and securities analysis. In December 2016 his Twitter account (@financial_orbit) was named as one of the ’50 accounts investors should follow in 2017’.

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