Hammond’s (low-cost) millennial pitch

Tom Stevenson
Tom Stevenson
Fidelity Personal Investing22 November 2017

As predicted, there were no real surprises. Even the flagship measure of Philip Hammond’s first Autumn Budget - the abolition of stamp duty for most first-time buyers - was just a bigger and better version of what had already been trailed.

The reason for this most predictable of Budgets is simple. The Chancellor is in a corner both economically and politically. And he is a naturally cautious man who was stung by his National Insurance U-turn in the spring.

He achieved his primary goal today. No mess-ups.

The only numbers that matter

Mr Hammond had no room for manoeuvre today for the simple reason that the economy is not growing fast enough to throw off any spare cash. The only numbers that really mattered in today’s speech were passed over very quickly in the first five minutes - the Office for Budget Responsibility’s growth predictions.

This year’s expected growth of 1.5% is both a quarter lower than the 2% expected at the time of the Spring Budget and below even the most recent expectations of about 1.6%.

As expected, growth slows even further next year and again in the following two years before picking up marginally to about this year’s rate by 2022.

In other words, the UK economy is set for growth of well below 2% for each of the next six years. That is a dreadful backdrop for a Chancellor hell-bent on restoring the public finances by the middle of the next decade. It will at a stroke wipe out half of the £26bn buffer he thought he had created in the spring.

The productivity conundrum

The principal reason for that low growth is home grown. The global economy is picking up but Britain is not capturing the benefit of that improvement because we earn less for every hour we work than almost all of our major competitors. No one is particularly sure why this should be but the likely culprits are weak management, low investment and poor infrastructure.

This is why Mr Hammond spent so long outlining different elements of the Government’s industrial strategy. A White Paper is promised (isn’t it always?) but there was more heat than light in a series of measures that are worthy enough (More Maths! The Midland Engine!) but handily don’t cost a huge amount.

Staying in power

The real purpose of today’s Budget, therefore, was not to set out a carefully-costed vision of the future but to set the Government up for the next election. The frequency of comparisons between the current administration and the last Labour Government shows how seriously Downing Street is taking the possibility of an election sooner rather than later.

To that end, the speech was peppered with sweeteners and was notable for the absence of anything that might ruffle feathers on the back benches.

The pain of slow payments in the new Universal Credit system was addressed. The National Living Wage was boosted. Personal Allowances edged higher. Alcohol duties were frozen. Air fares were treated favourably. The widely touted VAT hike for smaller businesses was brushed under the carpet. Pension contributions were left untouched.

There should be no U-turns this time around. There was nothing remotely dangerous enough.

The white rabbit

All of this led up to the flagship announcement of the Budget, a measure that combined two of the Chancellor’s principal targets - housing and the young.

After Brexit, inter-generational unfairness is the hottest political potato today. Young people are flocking to the warm embrace of Jeremy Corbyn’s socialist vision because they feel they have nothing to lose. Their parents are either equally alienated or guilty that they won the lottery of life by being born 30 years before their children. Neither makes them a natural supporter of the Government.

So Theresa May is right that fixing the broken housing market and restoring the social contract with the young should be the Government’s priority.

She has already made overtures on student loans and tuition fees so there was nothing more on that front today.

On housing though there was plenty. The Chancellor played along with the PM’s vision today by promising a £44bn package over eight years to build 300,000 houses a year, increasing the supply of land through a better planning system, stamping down on big builders sitting on land because it is more profitable to do that than to build on it, and training the construction workers that will be in such desperately short supply when the Poles go home.

The effective abolition of stamp duty for young first-time buyers is a bold move, a headline grabber, even if it, too, is not hugely expensive in the great scheme of things.

It will cost £670m a year in six years’ time. Helpful, but not a game changer for a government that spends around £800bn a year.

By slashing this up-front tax on the first £300,000 of the cost of houses priced at up to £500,000, the Chancellor has ensured that 95% of all first time buyers will benefit. It will be very popular even if there is a real danger that its principal achievement will be to push house prices even higher and further out of the reach of those same first-time buyers.

Market shrugs

As ever, the market reaction to an obviously political Budget was muted. The pound fell initially on the poor growth numbers but ended higher. The FTSE 100 rose, with some winners (estate agents) and some losers (housebuilders). Gilts were relieved that the Chancellor retained his grip on the public finances despite the increasingly unhelpful hand he has been dealt.

Savers and investors

For savers and investors this was the quietest Budget in a long time. No reduction in the annual allowance for pension contributions, the lifetime allowance rises in line with inflation, no change to the ISA contribution allowance, already boosted to a generous £20,000 a year.

Now the Chancellor must wait and see if he has done enough to achieve his other principal goal - keeping his own job.

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