The Emergency Budget 2010 comment: A macro perspective – tough medicine
Author: Philip Lawlor, Investment Strategist
“The imperative for the budget was to convince both the credit ratings agencies and the bond market that this is a credible fiscal deficit reduction programme that stands up to global comparison. It has fulfilled this requirement. Using revised Office for Budget Responsibility forecasts the projected decline in the PSNB requirement from 10.1% of GDP in 2010/11 to 1.1% in 2015/16 will be achieved via a fiscal contraction of over 6% of GDP over the next five years. This will come from a 77% reduction in real spending and 23% from higher taxes (meeting the 80/20 pledge). By the end of the Parliament in 2015 fiscal tightening will have built to a £40bn per annum run rate.
While the real test lies in the execution of the spending cuts and the sustainability of the growth projections, the government has the endorsement of the markets for the time being.
In terms of monetary policy the postponement of the increase in VAT until January 2011 provides time for inflation to decline from current high levels but undoubtedly it will make it harder for inflation to hit the Bank of England’s target of 2%. Nevertheless, the bond market believes inflation expectations are not likely to rise sharply given the magnitude of fiscal contraction coming down the line.”
Philip Lawlor, Investment Strategist - Telephone 020 7131 4841
Press Office:
Kate Harrison / Matt Rowe 020 7131 4228/4550
Disclaimer
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
Note to editors
Smith & Williamson is an independent professional and financial services group employing around 1,500 people. The group is a leading provider of investment management, financial advisory and accountancy services to private clients, professional practices and mid-to-large corporates. The group operates from offices in London, Belfast, Birmingham, Bristol, Dublin, Glasgow, Guildford, Salisbury, Southampton and Worcester.
Smith & Williamson Investment Management is part of the Smith & Williamson group.
Smith & Williamson Investment Management
A trading name of NCL Investments Limited (member of the London Stock Exchange) and Smith & Williamson Investment Management Limited. Both companies are authorised and regulated by the Financial Services Authority.
Smith & Williamson Investment Management Limited
Authorised and regulated by the Financial Services Authority
NCL Investments Limited
A member of the London Stock Exchange
Authorised and regulated by the Financial Services Authority