UK Budget 2013.

20th March 2013

Ian Copelin, Investment Director, my wealth comments “This afternoon the Chancellor of the Exchequer George Osborne delivered his fourth annual Budget statement to Parliament and with the UK economy on the verge of triple-dipping, it was George Osborne’s fourth Budget set against a background of a growing budget deficit and stumbling economic growth.

Given the recent loss of the UK’s AAA credit rating, the Chancellor had come under increased pressure (including some from within the coalition:  interestingly and potentially showing the divide, both Nick Clegg and Vince Cable wore LibDem yellow ties, while George Osborne and David Cameron, both wore blue ties) to abandon the coalition Government’s deficit reduction programme and do more to revive the economy and help hard-pressed households.

Unsurprisingly, during his Budget speech, George Osborne insisted that he was sticking to plan.  As a result, he had very little room for ‘giveaways’ and the statement was fiscally neutral – meaning that ‘giveaways had to be paid for by savings elsewhere.

From a stock market standpoint the annual Budget statement has little impact (many assume that the FTSE-100 will move in line with the UK’s economic outlook – however, the relationship between equity returns and economic growth is very tenuous especially as around 70% of the FTSE-100 earnings are generated outside of the UK).  As with previous statements the FTSE-100 barely moved during Chancellor George Osborne’s speech as the market digested his statement, moving in a narrow range between 6,443 and 6,461.

Of most relevance was the Bank of England’s mandate.  Ahead of the budget (and of Mark Carney taking over as the Governor of the Bank of England at the end of June 2013), there was talk that the Chancellor may widen the Bank of England’s remit (which is currently solely focused on inflation) and increase the 2% inflation target so that the Bank of England policy makers could do more to pursue economic growth.  Although George Osborne announced that a new remit, he stated that the 2% inflation target would be maintained.  However, the new remit recognises that inflation can depart from its target as a result of shocks and disturbances.  While changing the remit will pave the way for more QE, given that inflation rose to 2.8% in February, not changing the inflation target may blunt some of the Bank of England’s efforts.

The FTSE-100 is currently up 19 points today at 6,460 and is up 9.52% since the start of the year as US employment and Chinese growth has bolstered confidence in the global economic recovery.”