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Reaction to the Big Budget

The markets have taken a measured response to today’s first Tory budget for almost 20 years with sterling barely moving and gilt yields only ticking higher marginally. This suggests that the market has not changed its view on the first rate hike from the Bank of England coming in the early part of 2016. The Office of Budget Responsibility (OBR) kept growth forecasts broadly in line with those provided in March and investors feel that the drag on growth from welfare cuts will be made up by the creation of more jobs, where the OBR expects 1 million new jobs to be created in the next 5 years, but the government aims to double this to 2 million.

The Chancellor made it clear he wants the world’s big banks to keep their headquarters in the UK by phasing out the bank levy which gave the stock price of HSBC a 1% boost immediately after the announcement and the FTSE 100 rallied another 10 points with other bank stocks also edging higher. This move was then followed by surprise reductions in corporation tax, reducing the rate from 20% to 18% by 2020, continuing with his cuts to corporation tax in the last parliament which are arguably one of the main contributors to the turnaround in the UK economy and fall in unemployment. More money in companies’ coffers means more funds to increase employment putting more money in the pocket of consumers.

Whilst there was no change in the rates of tax paid on individual income there were measures announced to continue increasing the personal allowance and importantly doing so in line with the minimum wage. The Chancellor also commenced the increase in the higher rate tax bracket moving it to £43,000 next year in a move that he claimed will take 130,000 people out of paying the highest rate of tax.

Lastly, the rabbit out of the hat was the introduction of a national living wage, which will largely be paid for by the reduction in corporation tax, but the announcement of which led the FTSE 100 to pull back from its highs. All in all the budget can be seen as a very business orientated one which the markets have broadly welcomed.

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