Articles - Chancellor targets savers as pound coin receives facelift

Schroder's Chief Economist Keith Wade shares his thoughts on the 2014 Budget and the impact this will have on the market and future forecasts.

 “The Chancellor’s fifth budget focused on the "makers, doers and savers" in the economy and succeeded in delivering some surprises despite his lack of room for manoeuvre.

 Hemmed in by his borrowing targets, Chancellor Osborne was never going to be in a position to make significant giveaways, but in a nod toward the election he offered a few sweeteners. Alongside the new pound coin, cheaper beer and bingo, the clear target was savers and more specifically pensioners.

 Out goes the requirement for pensioners to buy an annuity and in come new national savings bonds offering attractive rates for those aged 65 and over. In addition, he is increasing the annual ISA savings allowance to £15k (currently £11.5k) and reducing the starting rate of income tax on savings to zero in 2014-15. The band to which this applies will be doubled to £5k from April next year. There is clearly a political element here as the Chancellor attempts to shore up the pensioner vote, but it is also an implicit acknowledgement that interest and savings rates will remain low for some considerable time to come.

 Certainly there is little in the OBR forecasts to alarm the Bank of England. Growth is expected to reach 2.7% this year before cooling to 2.3% in 2015, whilst inflation remains at 2%. The output gap does not close until 2018-19 keeping a cap on price rises, although spare capacity is used up a year earlier than previously expected. Critically, productivity is expected to accelerate allowing wages to pick up and outpace inflation. The slowdown in 2015 largely reflects the resumption of austerity with government consumption and investment slowing sharply. A better outcome will depend on the success of budget measures to boost investment through increased capital allowances and exports, through enhanced government finance and by reducing energy costs for manufacturers.

 Our forecasts are very similar, although we see slightly less of an improvement in productivity and slightly more inflation as a result. We are also less than convinced that the government will pursue fiscal consolidation with such zeal: on our calculations fiscal tightening is set to increase from just over 0.5% GDP in 2014-15 to 1.3% GDP in each of the subsequent three fiscal years. Past experience suggests that such consolidation is often promised but never delivered. Growth may be stronger in the near term as a result, but the budget deficit will not improve and turn into a surplus by 2018-19 as forecast by the Chancellor. That prediction, like the old pound coin, looks set to vanish in coming years.”

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