Budget 2016: Will Osborne's sweeping cuts restore the UK economy's flagging fortunes?
George Osborne, the UK’s chancellor of the exchequer, delivered his Budget on Wednesday 16 March. Forced to downgrade UK growth forecasts and admit missing targets, Osborne announced a range of measures including cutting capital gains tax to 20% from 28%. Corporation tax is expected to drop to 18% within the next four years, from its current level of 20%. By 2020, Osborne expects that corporation tax will decline to 17%. From that perspective, the UK is setting an example for the world to follow.
The Budget was however less bullish on the global economic outlook. Owing to turbulence in financial markets, low productivity growth in the developed world, structural weakness in developing countries and slack demand overall, the ‘cocktail of risks’ does not bode well from a macroeconomic perspective. Mr Osbourne also weighed in on the issue of a potential Brexit by stating that it would have a negative impact on the performance of the UK economy.
The chancellor is however of the opinion that the UK deficit will be cleared within the next four years, owing to the austerity measures adopted by the government. Here are some of the key points of his Budget:
- £20,000 per annum ISA limit for all savers
- £3.5 billion slashed from public expenditure by 2020
- Government freeze on fuel duty and certain business taxes
- £530 million to be generated from sugar tax revenues (18p–24p per litre)
- Top tax rates will be levied on incomes of £45,000+ (up from £42,385)
- The budget for flood defences will increase by £700 million (0.5% hike on insurance premium tax)
Sugar tax not so sweet for soft drink manufacturers
The sugar tax is one of the most substantial inclusions in the 2016 Budget, and it immediately led to a plunge in share prices of soft drink manufacturers, sugar companies and associated industries on the London Stock Exchange. The tax has since received bipartisan support, after initially being opposed by the prime minister’s office.
For traders, the Budget provides detailed insight into the government’s perspective on the domestic economy, the global economy and the interaction between the two. GDP growth for 2016 is now forecast at 2% (down 0.4%), for 2017 it is forecast at 2.2% (down 0.3%) and for the years following, GDP growth is forecast at 2.1% (down 0.2%). In other words, the overall perception of GDP growth in 2016 and beyond has been revised sharply lower. According to Mr Osborne, storm clouds are gathering but the UK economy is strong and prepared for whatever economic difficulties may be ahead.
In the aftermath of the poor GDP forecast for the current year and subsequent years, the GBP plunged to 1.4057 against the greenback, racking up losses of 0.6% by 1pm, but gradually recovered against the dollar and closed the day at 1.42721. The FTSE 100 spiked 0.6% after the Budget, with notable gains for the construction and oil industries, a sharp reversal from the flat trading that preceded the Budget. Overall, the FTSE 100 has performed strongly after plunging to a low in February 2016. It has gained 11.6% since then, and is now just 1% lower for the year-to-date.
Among the biggest gainers on the London Stock Exchange were:
- Ladbrokes +7.5%
- Premier Oil +8.2%
- St James’s Place +4.2%
- Taylor Wimpey +3.4%
The biggest losers were the drinks manufacturers whose earnings potential will be hit be the new sugar tax. For example, the maker of Vimto, Nichols, plunged 7% to 1,219p, and the maker of Robinsons squash, Britvic, fell to a low of 688p immediately following the announcement and opened weak on Thursday. Share prices of sugary stocks are likely to continue declining as the Budget percolates through the economy.
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