3 Mins
Spring and growth go together, don’t they? Jeremy Hunt’s budget last month was certainly billed as a budget for growth and one of our investment partners, Morningstar Investment Management, gave us their budget response. It’s safe to say there were several generous giveaways and some surprises in the announcement.
A 12-month extension of the 5p fuel duty cut and measures is intended to boost the number of people willing and able to work (such as increasing free childcare). Raising the annual pension tax-free allowance from £40,000 to £60,000 and abolishing the lifetime pension allowance amounted to a package worth around £22bn or 0.8% of GDP.
Positive Developments in the UK Economy
The last three months have seen a return of confidence in UK financial markets and resilience in economic activity, as evidenced by the rebound in sterling and stabilisation of the gilt markets.
This uplift in confidence has been driven by several factors. There has been a huge fall in wholesale gas prices, thus reducing the cost of the government’s energy price support. The UK’s government debt interest payments have been falling – driven by a lower retail price index (RPI) and a fall in interest rate expectations.
GDP growth has also been higher than anticipated as have tax receipts. The upshot was a reduction in borrowing forecasts from the Office of Budget Responsibility and allowed the Chancellor to announce the measures in his growth budget yesterday.
Market Reaction to the Spring Budget
There are positive views on both UK corporate bonds and the pound sterling. These have been held back by weak sentiment to UK assets, hit late last year following the Truss/Kwateng mini-budget and it was important the Budget contained no surprises.
Fiscal responsibility, therefore, was a key risk and if you take the Office for Budget Responsibility (OBR) forecasts of GDP growth at face value, the budget provided investors in UK assets some comfort.
Inflation is forecast to fall from the current 10.7% to 2.9% by the end of 2023, and the UK to avoid a recession this year*. Of course, last week inflation continued its upward trajectory.
We would point out the uncertainty with forecasts of this nature and that OBR’s outlook remains optimistic compared to other economists, such as the Bank of England. However, Morningstar don’t believe the package of measures has done too much to unsettle the market.
*Office for Budget Responsibility, Economic and Fiscal Outlook, March 2023
Changes to Pension Legislation
Looking at the changes to pension legislation, at the time of writing we’re awaiting the final bill and implementation, however, at first glance, the lifetime allowance (LTA) will be nil in 2023/34 and abolished thereafter. We had expected changes to the LTA but perhaps an increase to 2006-2010 levels. The abolition doesn’t rid us of the complexities of LTA rules and the various protections remain in place. Maximum tax-free cash also looks to be capped at 25% of the current £1,073,100 level. We’ll be able to provide more information as the rules are implemented.
Good news though for saving into pensions and in particular getting our doctors back into the workplace as many have/are considering early retirement due to the tax charges they incurred in recent years with CPI at much higher rates. Also, the very sensible decision to increase the Money Purchase Annual Allowance (MPAA) to £10,000. This impacted so many clients who have had changes in their personal circumstances and who accessed relatively small pension plans, thereby invoking the MPAA and being unable to replenish their pension savings.
Impact of Global Events on UK Markets
Turning back to Morningstar and impacts of how global events can impact our markets. The big news recently has been around the collapse of the Silicon Valley Bank (SVB). Those of us who were around in 2008 and Lehman and RBS have paid particular attention to this.
If you want to read more about this, Morningstar provided background here.
Get in touch
We would like to wish you a very Happy Easter, but as ever, if you have any questions about anything in this newsletter and how it affects your circumstances, please get in touch with us using the form below and we’ll get back to you soon.