These figures have since been confirmed by the IMF, which recently gave a very positive assessment of the outlook for the UK. The anticipated growth of 2.4% is higher than for any other European country, and the economy is now growing at its fastest rate since 2007. Inflation was down to 2% in December and the latest figures show that unemployment has fallen sharply to 7.1% (much lower than most economists were anticipating).
So with the Chancellor surely in buoyant mood when he stands up to deliver his speech, can we look forward to some Budget handouts? After all, there is a General Election only 15 months away and the European elections are in May of this year, at which the Conservatives risk coming a poor third behind UKIP and Labour. After four years of pain, it must surely be time for the Chancellor to place less emphasis on austerity…
Sadly, the answer is ‘no’.
In a speech on January 6th, George Osborne warned that 2014 would be “a year of hard truths.” He stressed that the UK economy “still had a long way to go” and that difficult decisions would have to be made. Significantly, he still requires another £25bn of savings (or ‘cuts’ depending on your political standpoint) and is looking to the welfare budget for the majority of this, particularly targeting young people of working age.
The Budget speech will be one that George Osborne will enjoy giving – he will claim the credit for the improvement in the economy and a further fall in the UK budget deficit. But the mood will remain sombre and the message simple: the UK economy has come a long way and is doing better than a great many of its competitors – but we cannot relax now.
The Budget Deficit
The UK’s budget deficit narrowed sharply in December, when there was a net deficit of £1.03bn compared to the £3.58bn in the previous month. Historically (taking the period 1995 to 2013), the budget deficit has averaged £1.23bn per month. George Osborne will welcome the reduction and look ahead to further falls in the deficit, but to many right-wing commentators it will remain far too large for comfort.
Welfare Spending
As noted above, this is the area where the Chancellor will look for the bulk of his savings. He will argue that it is absurd not to target the huge welfare budget, given that savings would otherwise have to come from more (politically sensitive) areas such as schools. However, Osborne is likely to resist calls from some of his backbenchers to make cuts in NHS budgets. That money is likely to remain ring fenced.
Housing
Figures released by the Bank of England revealed that £12.4bn in new mortgage loans was approved in December, putting mortgage lending at a six year high. The housing market rose by between 8% and 10% in 2013 (depending on which survey you use) but this included some notable ‘hot-spots’ such as London and the South East, and Manchester.
When George Osborne announced his help-to-buy scheme in the last Budget many commentators worried that it would create a ‘housing bubble’ and these latest figures will have done nothing to calm those fears. The Chancellor – backed by a recent study from the Institute for Fiscal Studies – will refute them and claim the help-to-buy scheme as a resounding success.
Unemployment
As above, unemployment came down significantly in December. Most economists were expecting a fall to 7.3%: instead unemployment came in at 7.1%. The Chancellor will anticipate further falls in 2014 and don’t be surprised to see further measures to encourage employers to take on staff, particularly in sectors like manufacturing and engineering.
Interest rates
An unemployment rate of 7% is the Bank of England’s ‘forward guidance threshold’ at which it was theoretically going to consider interest rate rises. However, no sooner had the figures been announced than Governor Mark Carney was declaring that rate rises were unlikely at the current moment, the UK economy being “well short of escape velocity.” Expect to hear the Chancellor use a phrase like, ‘this Government has overseen the longest period of sustained low interest rates since…’
That then is the background to the March Budget and a look ahead to some of the points we expect to see in it. As usual, we will be writing our own Budget report on March 19th and we’ll aim to have this with our clients the following day. Should you have any questions on how the planned changes in the Budget – or the outlook for the UK economy – might impact on your financial planning then as always, don’t hesitate to contact us.
