Final March Budget provides little spring to markets

Given that Chancellor of the Exchequer Philip Hammond had already declared his intention to move the Budget from Spring to Autumn no-one was expecting him to do too much.

From an investment perspective he lived down to low expectations and there were no changes to pensions tax relief. Advisers and clients are likely to be grateful on both counts.

The economic headlines focused on tackling the Budget deficit as the Chancellor largely stuck to his predecessor’s austerity script, albeit with select investment in areas such as infrastructure. The purse strings may be loosened in 2019, when Brexit is due to occur and the next General Election will be a year away, but not before.

The political headlines will focus on what is being seen as a broken manifesto commitment not to raise National Insurance contributions, as the Chancellor seeks to address the rise of the digital and gig economies and the changing nature of employment. With a consultation under way, further changes could be on the way for those clients who are self-employed or advisers who are involved in a partnership structure.


There were no major changes to GDP growth or inflation forecasts from the Office for Budget Responsibility (OBR), although the relevance of either to a FTSE 100 that gets around two-thirds of its profits from overseas is pretty limited.

How GDP growth forecasts have changed since the 2016 Budget

Source: Office for Budget Responsibility

How inflation forecasts have changed since the 2016 Budget

Source: Office for Budget Responsibility

One feature to note, though, is how the OBR’s forecasts expect growth in household consumption to slow from 3% in 2016 to 1.8% this year and 0.9% next.

Household spending is forecast to slow from here on

Source: Office for Budget Responsibility

This might not be great news for retailing stocks (although they have performed badly since 2015 so this may be no great shock to UK equity fund managers).

But it does reflect concerns published this week by ratings agency Standard & Poor’s about the danger posed by surging consumer borrowing and whether this is a sustainable basis for growth.

S&P flagged how personal debt in the UK has soared to new highs around the £1.9 trillion mark and that growth has started to slow, possibly to the detriment of the housing market (if mortgage applications slip) and the service industries which drive so much of our output.

That said, the latest mortgage application figures were the best for nearly a year, so this is likely to be a slow-burn story, if it plays out at all.

UK mortgage applications have started to bounce back despite fears over personal debt levels

Source: Bank of England


Portfolio-wise, this was a quiet Budget, as evidenced by how the FTSE 100 moved by just nine points (or barely a tenth of one percent) during Mr Hammond’s hour-long oration. The big share price moves of the day were the result of company-specific regulatory announcements, rather than new policies.

The bond market was similarly unmoved as the 10-year benchmark Gilt yield rose by just two basis points to 1.22% during the day.

Sterling did weaken ahead of the Chancellor’s speech to seven-week lows against the dollar, although the buck made ground against most major currencies on the day as markets continued to price in an interest rate increase from the US Federal Reserve on Wednesday 15 March.

The fact that the 10-year Gilt yield is still below where it was a year ago would suggest bond investors remain more sceptical than their equity counterparts concerning the Trump/reflation trade and hopes for faster growth.

Gilts were relatively unmoved by the Budget even as sterling slid against the dollar

Source: Thomson Reuters Datastream

There were lots of policy initiatives although the sums involved were generally small, as the Government continues to try and reduce the annual budget deficit and then tackle the aggregate one, which is still some £1.7 trillion or 87% of GDP.

The biggest news probably focused on two of the FTSE 100’s big five banks.

Doubtless encouraged by a rising share price, the Chancellor stuck to his plan to sell all of the Government’s remaining Lloyds shares by the end of March 2018.

And despite a rising share price, no fresh moves are afoot to reduce its stake in Royal Bank of Scotland, pending further clarity on the fate of its Williams & Glyn operation and the Department of Justice investigation in the USA into the mis-selling of mortgage-backed securities more than 10 years ago.

Pensions, savings and tax

Advisers and clients need to be aware of three key points from the 2017 Spring Budget from a tax, pensions and savings perspective.

  • First, the Chancellor left pension tax relief alone. However, the Government has pressed ahead with plans to reduce the annual allowance for those who have accessed their pension flexibly from £10,000 to just £4,000 from April 2017.
  • This means that clients who have accessed their pension from age 55 and taken anything other than their tax-free cash as income will unfortunately be subject to this new, lower allowance. It is important to remember that if clients have not accessed their retirement pot flexibly they can still save up to £40,000 a year in a pension tax-free.

  • Second, the annual dividend allowance has been put to the sword by Philip Hammond less than a year after his predecessor George Osborne introduced it. The cut from £5,000 to £2,000 in April 2018 will make it even more important that advisers and clients make full use of tax allowances available through ISAs and SIPPs. They will want to ensure that high dividend-paying investments are held within ISAs and SIPPs to minimise the impact of the dividend allowance cut.

How much more investors will pay in dividend tax each year post April 2018. Based on 4% dividend yield

Source: AJ Bell. For illustration purposes only
- the exact amount an investor pays will depend on their individual level of income

  • Finally, the Chancellor has moved to clamp down on abuse of Qualifying Recognised Overseas Pension Schemes (QROPS).

  • QROPS were originally designed to make it easier for people leaving the UK to retire to another country and take their pension with them. However, the structure has increasingly been manipulated by those looking to artificially cut their tax bills.

    To combat this, the Government has decided QROPS transfer requests on or after 9 March will be hit with a 25% tax charge. Broadly, it looks like there will only be an exemption to the tax charge where the individual and pension savings are in the same country, both are in the European Economic Area, or the QROPS is provided by the individual’s employer.

AJ Bell Investment Director

Russ Mould’s long experience of the capital markets began in 1991 when he became a Fund Manager at a leading provider of life insurance, pensions and asset management services. In 1993 he joined a prestigious investment bank, working as an Equity Analyst covering the technology sector for 12 years. Russ eventually joined Shares magazine in November 2005 as Technology Correspondent and became Editor of the magazine in July 2008. Following the acquisition of Shares' parent company, MSM Media, by AJ Bell Group, he was appointed as AJ Bell’s Investment Director in summer 2013.