Reneging on the rule shouldn’t concern investors; we have had 12 fiscal rules since 1997, and 10 of those have been broken or abandoned. Markets rarely bat an eyelid. It’s been seven decades since there were four consecutive years without a deficit.
Gilt yields were unmoved. Unsurprising given that the UK has the second lowest public debt to GDP ratio among the G7.
Raising the minimum wage
The 4.9 per cent rise in the national living wage will help lower-income households. Someone, somewhere must pay for higher minimum wages. Either domestic firms make less profit, cut jobs or other benefits, or pass the costs onto households in the form of higher prices.
In practice, there’s precious little evidence that firms cut jobs as a result of higher minimum wages. But that may be because the historic examples start from a relatively low base. Theoretically, there must be a point beyond which higher minimum wages lower employment, but that point is unknown.
We do not expect the higher living wage to exert significant pressure on inflation - historically this relationship has been very weak.
Tax on big tech
The new “tech tax” is aimed at technology platform providers with large revenues. A new tax on business is not something one would expect from a Conservative Chancellor, especially one designed with explicit interventionist intentions. However, it could be seen as correcting for a market distortion created by the tax loopholes that online companies use so deftly.
After a year with a net outflow of foreign direct investment, one might be concerned about disincentivising investment from globally dominant companies. But it is a sign of the times for techs. The next decade is likely to see a tightening of regulation in all jurisdictions and we are keeping an eye on long-term earnings projections.
Having said that, big tech appears committed to maintaining UK headquarters, despite Brexit uncertainty.
Do we need Brexit ‘headroom’?
The Chancellor maintained headroom of around £15bn against his fiscal rule to reduce the structural budget deficit to 2 per cent of GDP by 2020 to 2021.
We sometimes hear that forecasts of economic deterioration were wide of the mark after the referendum, so pessimistic forecasts may be similarly wide of the mark after a “no deal”.
That said, those post-referendum forecasts may not have been as wrong as you might think.
For example, after the referendum the Bank of England estimated that GDP would increase by just 0.5 per cent over the 12 months to June 2017, after which the economy would gather more steam and increase by 3 per cent to September 2018. Actually, GDP increased by about 2 per cent over the first 12 months, before decelerating to grow by 1.5 per cent to September 2018 (we’ve estimated the final quarter based on the monthly data available so far).
