Chancellor Rishi Sunak presented a fairly generous budget today. He was helped considerably – as widely expected — by raised forecasts from the Office of Budget Responsibility (OBR) on both GDP growth and the degree of permanent “scarring’’ from the Covid crisis.
This provided the source of funding that allowed the Chancellor to appear benevolent while still managing to meet his new fiscal rules, including a requirement that the Government’s everyday spending must be matched by tax revenues. These rules will please his Conservative colleagues.

I worry that the OBR’s forecast for strong economic growth next year looks a bit punchy given the economic headwinds we are facing. First among these are surging fuel costs. Higher utility bills will arrive this month and again next April when current price caps expire, and the lowest paid will be hit hardest.

Also, the government’s previously announced increase of the regressive National Insurance tax starting in April will again hurt the lower paid workers the most and may discourage employers from hiring. Whilst the announced reduction to the taper of Universal Credit will help, my concern is that it will be more than offset by utility bills and other price rises. The middle of next year will be a difficult period for the lowest paid workers.
It was interesting to me that the Chancellor said he wrote to the Bank of England (BOE) to remind them of their remit to act to control inflation. That sounded to me like a green light for the Bank to raise interest rates – Bank officials have already been discussing this. Yet as the Chancellor stated the causes of inflation – energy price rises and supply chain disruptions – are global in nature. So, a BOE rate rise may not do much to contain inflation, but it may at the margin slow the buoyant housing market.

Much of the detail in the budget was leaked in advance, and I have sympathy for the House Speaker, who complained this week that the Chancellor should announce his plans in the Commons rather than in the press. The reforms to business rates announced today aren’t a massive giveaway but should be welcomed. Don’t forget that business must contend with the previously announced higher corporation taxes in 2023. The 4% levy on larger housebuilders to pay for cladding upgrades will impact margins, though it has been expected, and the sector has underperformed for the last three months in anticipation.

Higher growth forecasts enabled a huge increase in public spending over the rest of this parliament yet a claim of fiscal prudence. The risk is that growth does ebb away through next year given the squeeze on real incomes likely to occur. Come what may, the level of monetary and fiscal stimulus provided in 2020/21 will reduce next year. I don’t believe an economic downturn is imminent, but we can expect more volatility in financial markets as that stimulus recedes.

Let’s hope for a mild winter with no enforced industrial closures to keep the lights on. And that middle class consumers remain willing next year to tap the considerable savings accumulated during the lockdown to spend on holidays, dining out and furnishing their homes. I remain convinced that for patient and increasingly selective investors there remain many good opportunities to generate returns.