Tax Cuts: Too Little Too Late to Boost the Economy?

BUDGET 2018: While the tax reductions and spending measures may boost retailers, the positive impact on investors is likely to be limited says Dan Kemp

Dan Kemp 30 October, 2018 | 10:04AM
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Dan Kemp: The last Budget before Brexit felt a bit like the end of a long car journey with children. As the destination gets closer, those in the back seats become increasingly fractious while those in the front pass out sweets to create distraction and bring temporary harmony. At these times, it is difficult to think and act long term but it is essential as investors that we do so.

With that in mind, a few things were noticeable about the Budget. First, the sweets were widely distributed, with additional money for the roll out of Universal Credit, defence, education, health, tax cuts and even potholes. This budget was clearly designed to engender an impression of fairness, generosity and optimism.

Second, the sweets all came in small wrappers. While the absolute numbers may appear to be large to us as individuals, they are likely to represent a limited benefit to those involved in implementation or to the economy as a whole.

Third, this was clearly a pre-Brexit Budget. The numbers that the Chancellor is using to justify the increased spending may look very different if no deal is reached by the end of March, necessitating an abrupt turn around in spending and borrowing.

So what does it mean for investors?

The answer is likely to be very little but with a wide band of uncertainty around that statement. By not making any bold spending or tax changes, it is likely that the Budget will be mildly beneficial for the economy.

However, the impact on the long-term value of UK stocks is likely to be muted by the fact that approximately 70% of the profits of companies in the FTSE 100 index come from countries outside the UK. In this context, UK equities continue to look attractive.

In contrast, the impact on gilts may be more significant. Lenders are seldom happy when borrowers spend more and therefore a move away from austerity, may add to pressure on gilt yields which already look very unattractive.

While some Budgets elicit a lasting change to the economy or financial markets, this does not appear to be this type of Budget. Rather it appears to be a myopic Budget with the objective of quietening down the government’s car as we Brexit.

As investors, such short-term actions are simply the background noise to the long term endeavour of identifying attractive assets that are going to deliver average average returns over the long term. The Budget appears to have done little to change the opportunity set for UK investors and so we remain focused on the road ahead.



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Dan Kemp

Dan Kemp  is Chief Investment Officer, Morningstar Investment Management EMEA

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