Avoid making immediate kneejerk reactions to the Budget before taking advice – that is the key takeaway of post -Budget analysis from JM Finn’s Head of Investment Office Jon Cunliffe and Associate Wealth Planner Charles Barrow on the Budget’s impact on the economy, markets, pensions and personal finances.
Summary of key points:
Budget mirrors global shift in fiscal policy
The Budget reflects a wider global shift among governments towards boosting GDP rather than shrinking debt. This approach contrasts with the post-Great Financial Crisis era, where sovereigns cut back spending, leading to weak growth and increased debt-to-GDP ratios. The current Budget front-loads fiscal stimulus, with a significant ramp-up in spending and minimal tax increases in the first year.
Fiscal tightening and economic growth
Despite the initial fiscal stimulus, the Budget is still considered tight over a five-year period, with a £68bn reduction in the cyclically adjusted primary deficit. The Office for Budget Responsibility (OBR) forecasts a significant boost in nominal GDP due to higher inflation in the near term.
Inflation and interest rates
The Budget's measures are expected to create a positive output gap, leading to higher inflation and a re-rating of short-rate expectations. It is likely that the Bank of England will still cut rates by 25 basis points next week as widely predicted.
Corporate profits and market reactions
The OBR's pessimistic outlook on corporate profits contrasts with the belief that nominal GDP will drive revenue growth. Markets’ disappointment with the Budget's spending allocation, favouring current spending over investment, has also contributed to negative reactions.
Long-term uncertainties
The OBR's forecasts suggest that public and private sector investments are substitutes rather than complements, leading to potential crowding out of private investment. The long-term impact of increased public investment on economic growth is highly uncertain. The potential for significant boosts to growth exists, but so does the risk of negative outcomes. The Budget's success will depend on various factors, including global economic conditions and domestic fiscal policies.
Budget impact on personal finance and pensions
There will be a technical consultation early next year regarding the pension changes. We would suggest waiting for the new rules to become legislation before assessing whether you need to take any action regarding your own finances.
While pensions are now included in estates for inheritance tax purposes, making them less attractive from an estate planning perspective, there are still tax saving benefits during the lifetime of the pension holder – so fully cashing in a pension at a relatively young age is unlikely to be a good plan. Annuities may come more into focus as an option, while previously common strategies during retirement to use up other funds first and pension funds last may now need rethinking. Overall, managing retirement and estate planning has become less straightforward since the Budget – therefore it is important to be more strategic about tax and cash flow planning and to make use of wealth planning services such as JM Finn’s.
To find out how JM Finn’s Wealth Planning team could help you manage the impact of the Budget on your finances, contact marketing@jmfinn.com
The value of securities and their income can fall as well as rise. Past performance should not be seen as an indication of future results. All views expressed are those of the author and should not be considered a recommendation or solicitation to buy or sell any products or securities. The information provided in this article is of a general nature and is not a substitute for specific advice with regard to your own circumstances. You are recommended to obtain specific advice from a qualified professional before you take any action or refrain from action.
