My initial Budget 2010 Analysis and Thoughts

Initial Analysis

This is budget which on first analysis appears to be strongly political and the Chancellor was unable to restrain himself on this front. There were much fewer economic statements than political ones I felt. He also set a theme early in this Budget when he gave us a reminder that “governments are a force for good” in his opinion and later he said “I believe that all governments have a responsibility to act”. Looking at some of the changes in more detail.

Fiscal Policy

Here were some of the moves that I was afraid of hearing.I had written above earlier that I had seen an estimate of  £112 billion as the reductions possible from the ruses that could be used to make the fiscal deficit look better over the next five years. As you can imagine I was listening intently at this point and I heard the Chancellor say that borrowing would be £100 billion lower over this period. As a comparison to the figures I quoted in my article from earlier today here are the old and new forecasts which are forecast fiscal deficit compared to Gross Domestic Product.

2009/10  12.6% is now 11.8%

2010/11  12.0% is now 11.1%

2011/12    9.1% is now  8.5%

2012/13   7.1% is now 6.8%

2013/14   5.5% is now 5.2%

2014/15   4.4% is now 4%

Done this way it is easy is it not?

There was one other revealing number when the Chancellor announced that our structural fiscal deficit would be reduced from 8.4% of GDP to 2.5% “by the end of the next Parliament”. So after a Parliament of so-called austerity we would still have a structural deficit. This will resonate when investors around the world take a look at us.

The net national debt  figures at 54% of GDP quoted will need a deeper look as the Office of National Statistics have the figures at more like 61%.

UK Growth

The estimates for UK economic growth remain rather heroic. We may or may not get growth in the range 1-1.5% for this year but 3-3.5% for the following years look rather optimistic at best and any failure to achieve this will affect the fiscal deficit figures adversely.

Government Spending

There were still very few details of how  any cuts in spending will be achieved. Indeed he opened with a statement that there will be a 2.2% real terms increase for the next fiscal year! We were promised more details from the spending departments so we will have to see. It was not reassuring to see claims of efficiency savings of some £26 1/2 billion over the period 2005/08 (which of course includes many of the most profligate years ever for UK government spending).

Asset Sales

I notice that some £16 billion is forecast to be achieved. I would simply point out that many of these sales were promised in a speech by Gordon Brown in 1997. It is now 2010.

Bank Lending

As expected bank lending came up as a subject and we were promised that the two banks which are part nationalised would increase their lending by £94 billion next fiscal year and of this we were promised that much of it would go to small and medium-sized businesses. The split is £44 billion for Lloyds and £50 billion for RBS.

Apart from sounding rather Stalinist in its conception there is the problem of how it will be achieved. According to Robert Peston of the BBC there is no evidence that the targets we had for last year were achieved and If I remember correctly he showed examples of falling and not rising lending! I have now had an opportunity to recheck the numbers and net lending did indeed fall at RBS.

Also there is a clear ruse at hand here as we now have a target for gross and not net lending although it must have slipped the Chancellor’s mind to point this out or to explain the difference. Apart from an implicit admittal that the previous targets did not work it of course also includes existing lending. This is not the impression given by the Budget speech.

Stamp Duty Exemption

This also came in as expected and I still think it is a poor decision to encourage first time buyers to take part in what is in my opinion a housing bubble. The financing of it sounds a little dubious to me as there must be a lot of buyers of properties below £250k can a reduction for them actually be paid for by raising duty on the presumably much fewer sales of over £1 million?

Above Inflation Duty Increases

As you know I am concerned about the institutionalisation of price increases in the UK and we duly saw several examples of this. Tobacco duty will rise at 1% over inflation this year and 2% next whereas alcohol will rise by 2% over inflation in both years. Poor old cider heads must be wondering what they have done with duty on it rising at 10% over inflation. Are there no Labour seats in the West Country?

There was a change in the increase on duty on fuel with it being staged in (April,October, January) rather than all coming on the 1st April. So there was at least some delay here although the total increase is unchanged.

Tinkering

We saw a lot of this with the Chancellor even having time to discuss a £35 million innovation fund for universities. This was curious as he seemed short of time to explain £20 billion of spending cuts. This has been a theme in previous budgets and I noticed that the Mortgage Support Scheme announced to great fanfare on a previous occasion has according to the reply by the Leader of the Opposition only helped 15 people.

Conclusion

This was a Budget drawing battle lines for the expected General Election. Accordingly the two main themes were politicking and interventionism.

In terms of economics the pictures was more mixed.

1. We are little the wiser as to how spending cuts will be achieved and so the plans still lack credibility

2. The Chancellor has not resisted the temptation to “manipulate” future borrowing figures in my view.

3. He may however have resisted some of the more ambitious plans of his neighbour at No’ 10 Downing Street. Most of the improvement in the public finances is being used to reduce borrowing

4. Future growth forecasts still look very optimistic particularly from 2012 when any austerity programme in the public-sector will have to bite.

5. Whichever party gets elected in May we are likely to see a budget from them as the Conservatives have already announced this and Labour now look like they will need another one too.

6. All Budgets involving Gordon Brown and his government require careful reading over the following 24/48 hours for seemingly insignificant details which are in fact very significant.

7. We are left with a huge gap between Capital Gains Tax at 18% and the top rate of Income Tax at 50%. This will encourage all sorts of financial engineering, so just at a time we are being told that such behaviour is “socially useless” it is in fact being incentivised.

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4 thoughts on “My initial Budget 2010 Analysis and Thoughts

  1. Pure smoke and mirrors electioneering, with nothing specific announced to address the enormous deficit. It almost looks like they do not expect to be re-elected? They therefore are leaving the mess for the next government (whomsoever that may be) to sort out.

    As you conclude – an essentially political “budget”. The real issue is what will the City and potential Gilt lenders think tomorrow, and will confidence fall or rise?

  2. “All Budgets involving Gordon Brown and his government require careful reading over the following 24/48 hours for seemingly insignificant details which are in fact very significant.”

    100% agree on this point. Surprisingly, for a pre-election “budget”, this one already looks shockingly bad. This before the normal 24/48hr digestion period. The small print might include some absolute horrors if this is anything to go by? We will see over the next day or so.

    For now the pound is already sinking further and the 10yr Gilt yield is up 5 basis points on the day at 3.96
    I think the markets may have already passed judgment.

    • Hi Zak and welcome to the comments section of my blog.

      Market responses can also take a while to occur. Many of the major players/investors in the world have much to follow/analyse and whilst we are not an insignificant country we are not the US,Japan, China etc. so we are not at the forefront of their minds. My fear is that by dithering and showing complacency we might move to the forefront of their minds at which point we would be vulnerable to them viewing us unfavourably. On the day we were probably helped by attention being on the Euro zone with Portugal being downgraded by the Fitch ratings agency.

  3. A country committed to reduce the deficit.But this year a 2.2% increase in real terms.

    I think thats all you need to know about credibility.

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