The budget was announced yesterday in the UK, and came in line with expectations with few surprises.
Growth was downgraded so that it is now in-line with our own forecasts, while the revisions to inflation are even more bearish than our own. Government has opted for further departmental spending cuts to plug the fiscal hole, rather than raising revenues – although as these get pushed further out, there will continue to be implementation concerns. Fiscal deficits have been revised up slightly in intermediate years, but the Chancellor will still run a budget surplus by his stated goal of 2019/2020 (the end of this current Parliament). His other fiscal goal – to get government debt/GDP on a downwards trajectory this year – will however be missed, and won’t be reached until 2017/2018.
Gilt issuance in 2016/2017 is relatively unchanged, which is a positive surprise to those who were expecting significant increases. The small degree of additional issuance has been placed in the ‘longs’ and ‘linker’ buckets – which given that these have been subject to increased demand from domestic and LDI investors – is unlikely to exert any pricing pressures. The subdued market reaction suggests that there is little here that is really unsettling investors.
Overall, the general sentiment is that Chancellor George Osborne did not wish to do anything radical in his eight budget and risk the ire of either his own party or the greater British public ahead of the Brexit referendum. In our view, the Conservatives want to keep people onside as much as possible in their campaign to stay in the EU.
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