No major surprises from Osborne in the Budget Now we wait for Ratings Agencies

Today’s budget re-affirmed the balance the coalition government is attempting to strike between growth and austerity, whilst not delivering anything dramatic, largely in part to the widespread leak of many of the new measures announced.

No significant surprises
This budget felt much like reading a novel and then seeing the movie; there was no shock, no surprise and therefore nothing of substance to trigger significant price action in the financial markets.

Perhaps the biggest surprise from George Osborne was the Wallace and Gromit quip, which showed, albeit clearly rehearsed, some character from the Chancellor, who is often accused of lacking personality. It was also telling that it got the biggest cheer of his whole speech, perhaps due to the fact that it was the only element not expected by the House!

The FTSE 100 and the pound sterling remained mostly unchanged in the immediate aftermath of the budget speech, suggesting perhaps not much has changed that deviates from existing expectations.

Focus on Ratings Agencies
The focus now switches to ratings agencies, particularly Fitch and Moody’s. It will be interesting to see what their reaction will be to today’s budget considering they recently placed the UK on a negative outlook, with a possible ratings cut on the cards in the not too distant future.

There was no real move away from November’s forecast however, both in terms of public sector borrowing and GDP. As such, it’s hard to imagine there is enough grounds for ratings agencies to change their latest thinking on their UK ratings, unless the British economy’s momentum begins to subside. Does this budget impact the UK’s growing status as a safe haven investment location? Perhaps not.

Small revisions to GDP and PSNB
UK GDP projections were increased marginally for this year to 0.8% from 0.7% by the Office of Budget and Responsibility (“OBR”), though this is nothing of a surprise given the stronger start to the year. At the same time, the OBR’s GDP forecasts for the following year remain somewhat optimistic, particularly given the sharp correction in GDP projection for 2012 from that of which the fiscal body forecast at this time last year. 2013 GDP was revised lower to 2% from 2.1%, whilst the remaining projections were left unchanged, with 2014 at 2.7% and 2015 at 3%.

There was slight disappointment in public sector net borrowing, which is expected to come in £1bn below the £127billion projection for the year by the OBR. It had been hoped that this figure could have undershot the target more significantly, although with this mornings’ release of the latest PSNB figures, it’s clear last month that borrowing was ramped up to meet forecasts. There was no change to the £120billion borrowing forecast for this new fiscal year, whilst 2013-14 forecasts was marginally lowered to £98billion from £100billion.

Top tax rate cut
Of course we already knew too about the cut in the top rate of tax to 45p from 50p, and in the rise of personal allowance threshold by £1,100 to £9205 in 2013-14; the biggest increase ever according to Osborne. Whilst this edges us closer to the £10k threshold that the Liberal Democrats demanded as part of the coalition agreement, the rise was slightly higher than expected. This still seems a politically motivated move than necssarily a fiscal one, though undoubtedly it does help to motivate more high calibre talent and businesses to remain in the city of London than Brussels.

Oil explorers benefit from new field allowance
The FTSE 100 did edge marginally higher through the duration of the speech helped in part by gains in oil stocks on the back of the announcement of £3billion worth of new field allowances to exploration off the shores of the Shetland Islands. The news helped to lift the share prices of several oil explorers as the size of the investment was a bit of a surprise.

Faroe Petroleum was one small cap stock in particular to have rallied on the back of the announcement, with the firm’s shares price gaining over 7% on the day. Valiant Petroleum shares also gained on the back of the news.

Tobacco stocks hold onto gains
Tobacco stocks held their daily gains despite the announcement of a 5% increase in tobacco duty from 6PM GMT today. Despite a knee jerk and bearish reaction in the share prices of British American Tobacco and Imperial Tobacco in the immediate aftermath of the announcement, both stocks held onto their gains, with the FTSE 350 tobacco sector gaining 0.8% on the day.

Property firms slump on Stamp Duty change
Property firms did suffer weaker demand for their shares and investors sold out of companies such as Savills after the announcement of aggressive attempts to clamp down on stamp duty avoidance for homes worth £2m and more. The announcement of a 15% charge for £2m homes bought through companies was a surprise and is aggressive, whilst the 7% new stamp duty level for homes worth £2m was already much speculated in the press. Savills shares lost 2.8% as a result.

Previous Report

20/03/2012 (4.45pm)

Maintaining Austerity vs Re-igniting Growth. What Balance will Osborne strike?
Tomorrow’s budget by the Chancellor of the Exchequer, George Osborne, will be watched closely by the market, ratings agencies and most probably high income earners.

Whilst it is going to be hard to shy away from the politically sensitive elements expected within tomorrow’s budget, such as a potential reduction in the top tax rate from 50p to 45p, there are going to be some crucially important elements on which investors will intensely focus, namely; revisions to growth estimates, borrowing forecasts and additional measures to help stimulate growth in the Queen’s jubilee year.

As ever, there is a fine line between stimulating growth and cementing Britain’s top notch credit rating with austerity. This line will also be closely watched tomorrow, with any sign of deviation or ‘relaxation’ of austerity to help stimulate growth likely send a somewhat nervous switch in focus by investors to see if ratings agencies react, particularly Moody’s and Fitch, who have both recently placed the UK on a negative watch for a ratings cut.

Recent data has also insinuated that borrowing costs should come in lower than the £127bn forecast by the OBR in November. A figure closer to £120bn would really go down well with ratings agencies though a figure closer to £124bn may be realised. At the same time, with the government set to take on the Royal Mail’s pension fund too, Osbourne is expected to transfer £28bn over to help speed the cut to borrowing further. The OBR has forecast that borrowing was set to be £120bn in the new fiscal year, followed by £100bn the following year. As with GDP projections, any revisions here will be watched closely by both investors and ratings agencies.

Whilst Britain remains at risk of losing its top notch credit rating, the current fiscal path insinuates that it is likely to retain its Triple ‘A’ rating, despite the negative outlooks by Fitch and Moody’s. Nevertheless, it will be a difficult job for Osborne to relax his austerity grip whilst at the same time seeking to announce policies that will boost growth.

There is every chance, allbeit a small one, that we could see some good news regarding growth projections. A stronger than expected start to the new year is likely to help the UK avoid a technical double dip recession after a contraction of 0.2% in the last quarter, and whilst the Office of Budget and Responsibility (OBR) revised their 2012 GDP projection down sharply to 0.7%, there remains a hope, albeit small, that this could be marginally revised higher. Forthcoming growth projections will also be watched closely though we are unlikely to see a substantial change given the lack of significant improvement since November 2011.

So how will George Osborne look to stimulate growth? Tax could be both a hot political and financial markets topic tomorrow with the top income tax rate speculated to be cut. Yet given the long running debate about how much the top tax rate actually contributes to the £160bn of income tax revenue versus the argument of scaring away talent from the City of London, remains highly debatable. Regardless, the City will likely cheer a cut.

We could also see an increase in the personal allowance amount given the pressure applied to lift the allowance threshold to £10,000 by the Liberal Democrats as part of the collation agreement. Last year, the Chancellor increased the personal allowance threshold by £630 to £8,105 for 2012/2013. Whilst it may be premature to project that this is likely to be raised to £10,000 in tomorrow’s speech, another step of increase could well be announced to satisfy both Osborne’s Lib Dem coalition brethren, plus attempt to put more cash in the hands of the country’s poorest.

It has already been well leaked that the Chancellor could relax Sunday trading limits for major retailers during the Olympics and it should not be underestimated the impact the Olympics could have not only on retail spending, but also additional costs to the public purse, though much of this has already been taken into account. Indeed, since the leak concerning the relaxation of trading caps, we have already started to see higher demand for the shares of major retailers and supermarkets such as Tesco and Morrisons on as a result, which could limit the potential upside in retailer shares should the announcement actually come.

All eyes on the Chancellor’s speech.