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UK Budget: Boring is the new black

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The law of diminishing utilities has many implications and can be applied to various areas of human activity. It is the reason, for instance, why most will happily toss a coin for a pound but not for ten thousand. The upside delivers less utility than the downside takes away. This difference is ignored when betting for negligible stakes, but not for meaningful ones. 

This asymmetry of up- and downside also manifests itself in politics. If the Chancellor robs Peter of a pound and pays it to Paul, Paul will be somewhat chuffed but Peter will be absolutely livid. Peter will berate his MP at the next surgery, revoke his party membership and possibly (heaven forfend) vote ‘the other way’ at the next election. Paul, meanwhile will forget about his little windfall in minutes.

Pity, then, poor Philip Hammond, sipping water last Wednesday lunchtime, while facing a tri-pincer movement in the form of downward revisions to growth, falling real wages in the public sector and a wafer-thin parliamentary majority. The result was predictable – very little. Even his main ‘giveaway’ – a sop to first time buyers in the form of a stamp duty cut – was immediately deemed by the OBR to be likely to raise house prices and therefore benefit existing, rather than future, homeowners. 

The promise of an extra 300,000 houses per annum was well received, but there is many a slip twixt cup and lip. Indeed, it is not at all clear that this government, with its precarious majority, will risk the wrath of its backbenchers by loosening planning regulations sufficiently to allow the building of so many houses in areas where people actually want to live. Neither is it clear that the promised review of land-banking practices, which caused a sell-off in housebuilders’ share prices on its announcement, will do much to encourage building – indeed, quite the opposite is likely in the short term. 

There was good news for wealthy investors whose ability to save into pensions has been severely curtailed in recent years. From April next year investors will be able to invest £2m, rather than the current £1m in enterprise investment schemes and receive a 30% tax break. This was about as bold as Hammond got, given that this move, while benefitting start-ups, will provide extra tax relief for only the very well-off and therefore is something of a double-edged sword politically. 

Other measures represented a bit of tinkering around the edges but, overall, Hammond managed to avoid the feeling that Peter was being robbed to pay Paul. There were no big ideas and, mercifully, no more changes to pensions. Markets, with the exception of the abovementioned housebuilder shares, as might be expected, were supinely relaxed. GBP/USD moved a cent higher on the day but that was driven by a weaker USD. GBP/EUR was virtually unchanged, as were gilt yields and swap rates. Boring is the new black.  

Although the government’s priority appears to be Brexit, its more important task is to prevent a Corybynite Labour Party from being elected. Even a diamond-hard Brexit would be a side-show were an early election forced. Hammond succeeded in avoiding banana skins (unlike last time, with the self-employed NI debacle) but it is anyone’s guess whether that will be enough to prevent Corbyn’s momentum – and that is all that matters.   

 

All views expressed here are the author's own and are based on information and data available at the time of writing.

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