Autumn Statement.

6th December 2012

Ian Copelin, Investment Director, my wealth comments “As every year passes the Chancellor of the Exchequer’s Autumn Statements looks more and more like a full-blown Budget – and yesterday’s Autumn Statement was no exception.

With the coalition government halfway through its term in government, normally the Chancellor of the Exchequer, would be expected to start talking about ‘giveaways’ and growth to boost their re-election prospects.  Unfortunately, the good old days of giveaway budgets are a distant memory given the state of UK economy – which has not been helped by external factors.

Yesterday George Osborne, the Chancellor of the Exchequer, had little room to manoeuvre, especially as new forecasts from the Office for Budget Responsibility (OBR) showed the UK economy will shrink 0.1% this year instead growing 0.8% (as predicted by the OBR in March) and expand by just 1.2% next year instead of 2%.

The notable policy changes announced by George Osborne yesterday include:

• an additional 1 percentage point cut in corporation tax to 21% in 2014 (it is currently 24%);
• the planned 3p-per-litre increase in fuel duty in January was cancelled;
• the annual tax-free allowance on pension contributions will be reduced by £10,000 to £40,000 in 2014/15;
• the lifetime size an individual receives tax relief in their pension will be reduced from £1.5m to £1.25m in 2014/15;
• the personal allowance will rise by a further £235 on top of the increase announced in the March 2012 Budget to £9,440 from April 2013;
• the levy on bank balance sheets will rise to 0.13% from 0.088%.

Although these measures will be fiscally broadly neutral over the coming years, George Osborne did announce that he no longer expects to meet his debt target – he extended his fiscal consolidation by one year to the 2017-18 fiscal year and said he will miss his target to start cutting debt as a percentage of gross domestic product (GDP) in 2015 by a year (the debt-to-GDP ratio is now expected to peak at 79.9% in 2015-16 before starting to decline).

While the credit rating agency, Fitch Ratings, warned last night that letting the debt target slip “weakens the credibility” of the UK’s AAA rating, the message from the market was clear:  letting the debt target slip was preferable to jeopardizing the recovery by tightening fiscal policy further, as 10-year gilts strengthen which pushed yields down 3 basis points to 1.776%, while sterling was little changed against the dollar and the euro.

Also the OBR’s lower UK growth expectations did not impact UK equities:  the FTSE-100 closed up 23.04 points yesterday and is up a further 19 points this morning at 5,911 as the market focuses on China’s stimulus measures to bolster growth and statements suggesting that US President Barack Obama will be able to strike a deal with Republican Congressional leaders to avoid the fiscal cliff.

Market sentiment has also been helped by Monday’s announcement that Greece was offering €10bn to buy back €30bn of its bonds from investors and banks.  While the buyback had been expected, the prices offered by the Greek government were higher than the market was expecting, with a minimum price of 30 cents and a maximum of 40 cents.  If successful, the exchange will retire about half of Greece’s €62bn debt owed to the private sector.”