Even more than usual, yesterday’s Autumn Statement by George Osborne was all about the politics.
The chancellor gave a tweak there, and a fiddle there. But it was mostly about him being able to stand up and rub his opponents’ faces in the fact that the UK economy seems to be rebounding.
Of course, the men who are mostly responsible for the British recovery weren’t in the room to watch a positively puce Ed Balls growl ineffectually at a trying-very-hard-not-to-be-smug Osborne.
Sir Mervyn King left his post earlier this year. And his replacement as Bank of England governor, Mark Carney, was busy doing his job. Which is a good thing, because Osborne has once again left all the heavy lifting on the economy to him.
And that has two big implications for investors…
Osborne’s lazy day
The biggest surprise about yesterday’s Autumn Statement is that Osborne didn’t even announce half of the things that had been leaked to the press before he stood up.
There was barely a whisper about Individual Savings Accounts (Isas), for example.
We were all ready to scream excitedly about peer-to-peer lending being allowed in Isas, or to boo and hiss at the idea of a lifetime limit. But there was nothing, bar a promise to look at reducing the five-year maturity limit on holding individual retail bonds in an Isa.
There was a line about removing stamp duty on exchange-traded funds, which was nice, but really means more for the City than for investors, as my colleague Ed Bowsher discussed yesterday. And there were a few little throwaway headline grabbers, which my colleague Matthew Partridge has taken a look at – making it cheaper to employ the under-21s; some relief on business rates; and the obligatory fuel duty freeze.
But overall, as Matthew Engels put it in the FT: “The chancellor gave away nothing worth mentioning and he took nothing away, except an hour of precious time.”
There’s a good reason for that. The most politically sensible thing for the chancellor to do was to sit on his hands. The economy is showing signs of recovery, however artificially induced. So he doesn’t need to be seen to be desperately ‘doing something’.
Meanwhile, the election is distant enough – still another 18 months away roughly – that any bribes will have been forgotten by voters by the time they have to go to the ballot box. Why launch any big giveaways now, when there’s everything to play for next year?
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Business as usual doesn’t mean what you think
So it’s business as usual. But business as usual might not be what you think it is.
The coalition – or the Tory part of the coalition anyway – likes to talk tough on austerity, and cracking down on spending. But as anyone who reads the figures knows, government spending is continuing to increase. The Office for Budget Responsibility (OBR) reckons that the over-spending won’t stop until the 2018/19 financial year.
The government has also discovered a handy new bottomless pit of imaginary money. These days, it’s tax avoidance. If the government needs to find a lot of money in a hurry, it says it’s going to crack down on tax evasion. Somehow, the latest measures are expected to raise billions in the coming years.
However, the main thing underpinning the government’s hopes and dreams is the idea of growth. Growth means a stronger economy, and thus a bigger tax take.
But what’s responsible for Britain’s rebound? It’s not the government as such. It’s the country’s record-low interest rates, and the channelling of that money into the property market via the Help-to-Buy scheme.
So what it really boils down to is that a lot of the heavy lifting in this recovery is still being turned over to the Bank of England. And while Bank of England governor Mark Carney might have indulged in a bit of political point-scoring by scrapping Funding for Lending for mortgage loans the other day, a cynic would argue that this was the perfect low-cost way to rebuff criticisms that he’s the chancellor’s poodle. Scrapping it made Carney look like a tough guy, but in the end there’s still plenty of support for the property market, so no harm done.
The problem is, this recovery – as with the boom before it – is based on debt. Not just government debt, but household debt. In fact, the OBR’s own projections for growth show that its economic predictions are based on consumers saving less, and becoming more indebted.
If households had hardly any debt right now, that needn’t be a problem. But most are still bloated with the last batch they took out. As Gavin Kelly of the Resolution Foundation think tank noted in the FT the other day: “Nearly a third of mortgage debt is held by households that have borrowed more than four times their income; and a sixth of it is held by those who have less than £200 a month left after spending on essentials.”
And we’re in that state “despite 57 consecutive months of the lowest interest rates in 300 years. It is clear that some people are going to be in trouble when rates rise.”
This leaves the Bank with a tricky problem. It has said that it’ll revisit the case for raising interest rates if unemployment falls to 7%. But as Chris Giles notes in the FT, the OBR now reckons that’s pretty much likely to happen this coming spring. That’s “much earlier than the BoE expects.”
If interest rates go up, you can kiss goodbye to the recovery. What does that mean? Well, logically it means that rates won’t go up. And certainly not this side of the election.
That suggests two things, in terms of investment. For one, the pound is an accident waiting to happen. It’s being pushed higher in the expectation that Carney will be pushed into raising rates sooner than he wants to. But at some point, it will become clear to the market that he has no intention of being forced in to any such thing. And that will be messy for the pound. That’s one reason why we still think it’s a good idea to get overseas exposure in your portfolio.
Secondly, it suggests that there’s likely to be some room left in this cyclical recovery in the UK. In last week’s issue of MoneyWeek magazine, my colleague Phil Oakley tipped one stock that could do well out of any continuing reflation of the housing market. If you’re not already a subscriber, get your first three issues free here.
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