The economic outlook is bleak – there's no doubt about that with the growth forecast cut by half for this year. But the Chancellor's decision to help the housing market is welcome. Consumption has brought us out of every recession in the past and The Turcan Connell Group strongly believes it will be the same this time around. The measures announced today were not expected and should help the economy. But we need more policies like this to boost growth further.
We strongly welcome the decision to help homebuyers with interest-free loans and support for mortgages. Combined with the cut in corporation tax and increased infrastructure spending, these are all policies that are sending us in the right direction. It's disappointing we haven't seen measures like this to date, as evidenced by the cut in the country's 2013 growth forecast to 0.6% from 1.2%. We would have liked to see some more original thoughts from the government that could have an immediate impact – a reduction in VAT, perhaps?
As we have said in previous budget responses, the sad truth is that economic forecasts from both the government and the Office for Budget Responsibility in the past were wildly ambitious. Growth targets – like those on inflation – have been delusional. Our tax revenue is nowhere near enough to meet spending. And while the amount of new debt we are taking on might be shrinking, our borrowing is still very much increasing (and rising as a proportion of GDP).
At least part of the blame for this lies with the government – they have introduced a half-hearted austerity plan, not implementing the cuts that were needed while at the same time talking so tough that they've scared the consumer into cutting back on any significant spending.
Bank of England/Monetary Policy
The seemingly greater flexibility in relation to inflation has made formal what has been the bank's unofficial policy for some time. Whether any other changes at the Bank of England (such as the proposed intermediate policy thresholds) will make much difference remains to be seen – installing a new governor is one thing, changing the culture of a 300-year-old institution is another.
It's quite clear that quantitative easing has not been working - banks have just been using the money to shore up their balance sheets. Funding for Lending – a very good idea – hasn't been working to date, so the announcement to extend its scope is welcome. To be fully effective it will require more confidence on the part of the consumer to borrow, and hopefully some of the announcements today will aid that.
The more forecasts you get wrong, the less people trust you – on that basis the worst outcome of this budget is the loss of credibility for the OBR (cutting your forecast for growth by half is a significant change). Turcan Connell Asset Management has long predicted a decline for conventional gilts because of the fundamental problems in the UK economy that we outlined above. That could be exacerbated should foreign investors lose trust in our data, which becomes more and more likely, the more we get our forecasts wrong.
On a more broad point, UK businesses are tied more closely to the global economy than to the domestic one, which means they are somewhat immune to our economic woes.
Overall, the budget reinforces Turcan Connell Asset Management's view that equities in general are preferable to conventional UK Government debt at present.
Chief Investment Officer, Turcan Connell Asset Management
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