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    MARKET EDGES

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Yesterday, Chancellor of the Exchequer Alistair Darling delivered the UK’s 2010 Budget.  Below are segments of his speech concerning go-forward policy that we found worthy of mention:

  • At its heart is a £2.5bn one-off growth package – to help small business, promote innovation, invest in national infrastructure and key skills.
  • At the Pre-Budget Report I put in place a one-off 50 per cent tax on the excessive bonuses of bankers….I can tell the House that this tax has raised £2bn, more than twice as much as was forecast.
  • Last week’s figures, however, showed that UK unemployment had fallen, and is lower than in the euro area and America.  Even after the severity of this recession, the claimant count stands today at 1.6m people. This compares with three million people in the recessions of the early 1980s and 90s.
  • For younger workers, I have introduced a guarantee of a job or training for every 18 to 24 year-old after six months out-of-work, which is already proving a success.
  • This year, as I said in last year’s Budget and Pre-Budget Report, I expect the economy to grow by between 1 and 1 ½ per cent. I will bring my forecast for 2011 in line with that of the Bank of England, to growth of between 3 and 3 ½ per cent.
  • I want, however, to help families and business through this period…. Instead of the planned increase, fuel duty will rise by a penny in April, less than inflation [currently at +3.0% in February].
  • By the time the full rise comes in, at the beginning of next year, I am forecasting inflation to be back below 2 per cent.
  • At the Pre-Budget Report, I forecast that public sector net borrowing would reach £178bn this year…. As a result, I can tell the House that borrowing this year should now be £11bn lower than forecast, at £167bn.
  • But with the economy recovering in later years, together with the revenue from tax increases already announced, borrowing will fall to £131bn in 2011-12; then £110bn; in 2013-14 it will be £89bn; and it will reach £74bn in 2014-15 - that is £8bn lower than forecast in December.
  • As a share of the economy, borrowing is forecast at 11.8 per cent of GDP this year. It will then fall to 11.1 per cent next year; then 8.5 per cent; in 2012-13 it will be 6.8 per cent; then 5.2 per cent; and fall to 4.0 per cent in 2014-15.
  • I know there are some demanding immediate cuts to public spending. I believe such a policy would be both wrong and dangerous. To start cutting now risks derailing the recovery …
  • The 50 per cent rate of income tax will come in next month, but only affects those with earnings over £150,000 a year, the top 1 per cent of earners.
  • I have no further announcements on VAT, on income tax, or National Insurance rates.
  • At the Pre-Budget Report we committed government departments to find over £11bn of new savings through reforms, without damaging front-line services… In total, [we have now found] over £20bn worth of savings to reduce borrowing and protect front-line services.
  • I will help small businesses to expand by doubling the annual investment allowance to £100,000. As a result, 99 per cent of businesses will be able to deduct in the first year, from their taxable profits, all investments in plant and machinery.

One remark from the speech is Darling’s tone on UK banks. He notes that, “We will sell our shares in RBS and Lloyds, as well as Northern Rock, in a way that maximises value for the taxpayer and recoups the money we invested.” He paints with a wide brush the excesses of UK banking bonuses and stresses the benefit of the revenue generated from the one-time banker tax, but in his populist stance ignores mentioning that such taxes could cause employees to walk from the country to such centers as Frankfurt or Zurich, a not inconsequential point due to the significance of the banking industry for the UK economy. 

While yesterday's budget announcement doesn’t change our bearish view on the UK economy, it adds incremental data to our investment outlook.

Matthew Hedrick

Analyst