Investment News Spending Review Initial Reactions 18471397
Spending review: initial reactions
20 October 2010 / by Paul Dicken
The coalition government’s comprehensive spending review, announced on 20 October, revealed few surprises for the markets or commentators.
Although Chancellor George Osborne tried to spring a surprise on Labour by announcing overall departmental spending was being cut by 19 per cent over four years where Labour had planned for 20 per cent.
He said the coalition government’s Budget and spending review had ‘taken our country back from the brink of bankruptcy.’
Responding to the statement, the shadow chancellor Alan Johnson accused the government of being reckless and risking the recovery of the UK economy.
The statement made included confirmation of previous announcements such as a £2.5billion ‘pupil premium’ for schools targeted on educational development for disadvantaged pupils and cuts of eight per cent to the Ministry of Defence budget.
“The distributional analysis published today shows that those on the highest incomes will contribute more towards the entire fiscal consolidation, not just in cash terms, but also as a proportion of their income and consumption of public services combined,” Osborne said as he sought to paint the measures as fair.
He described the decision to remove child benefit from higher rate tax payers as ‘difficult’ (made at the Conservative party conference in September), and announced existing universal benefits for pensioners would be retained, such as free eye tests, free prescription charges, and made the increase in cold weather payments permanent.
The British Bankers Association (BBA) said the permanent levy on banks was previously announced and ‘not unexpected.’
The government intends to publish legislation by the end of the year to introduce a permanent levy which it expects to generate around £2.5billion a year, a greater figure than the Labour government’s payroll or bonus tax.
The chancellor, George Osborne, in his statement to parliament said ‘spending reductions rather than tax rises needed to make up the bulk of the consolidation’ in the public finances.
The BBA said: “Financial services currently contribute around £24billion in taxes every year so we are please the chancellor said he wishes to balance taxation with the attractiveness of the UK as a global financial centre and the need to retain jobs.”
The spending review document did say the government would pursue efforts internationally to introduce a ‘financial activities tax on profits and remuneration’. To do this on a national basis is seen as being anti-competitive.
Head of UK equities at asset managers F&C, Peter Lees said equity and bond markets would find little either to excite or shock in the spending review.
“This was borne out in the FTSE 100 which finished George Osbornes’ speech at much the same level as at the beginning (though it did rise and then fall again in the middle).”
Lees pointed to some sectors in the UK economy that might be boosted by the announcements, such as transport and some possibilities for support service companies as reform areas, such as welfare, may involve outsourcing contracts.
Foreign exchange company Travelex said that sterling had risen against the dollar during the CSR.
Head of the UK trading desk at Travelex, Mark Bolsom, said: “The coalition is gambling that the private sector will step in and plug the gap in the jobs market but there is no guarantee that this will be successful.
“Ultimately, if the private sector does not step forward to plug the gap in jobs; the UK will fall back into recession and sterling’s value will plummet.”
Public services, economy and pensions
Simon Kirby at the National Institute for Economic and Social Research (NIESR) said the institutes predictions of cuts to departmental spending of around two thirds of the mooted 25 per cent had been borne out.
“We know there is more work being done and more to come in welfare. I would welcome the bringing forward of the plan to increase the state pension age. We’ve been advocating this as something that should be done.”
He said the plans to make the state pension age 66 for men and women by 2020 would help repair the public finances and provide a boost to the economy as people work longer.
The announcements that capital spending reductions will be lower than initially stated in the June Budget with numerous transport projects going ahead would be ‘cautiously welcomed’ by the construction industry, Kirby suggested.
He also warned about the impacts that would be felt due to the cuts going to local government.
“It’s worth noting that spending to local government is being cut by a quarter in real terms over the next five years. This is a dramatic cut that will have an impact on frontline services.”
Responding to the changes to the state pension age, Ian Naismith, head of pensions market development at Scottish Widows said the increases were unavoidable as average life expectancy rises and preferable to cuts in the state pension levels.
“We are pleased the government has allowed a suitable period before the changes to previously planned increases start, while retaining the plans to align male and female state pension ages by 2020. As always, it is important that the change is clearly communicated to consumers as soon as possible to give them time to adjust their retirement plans.”
The spending review report confirmed that the government is pressing ahead with auto-enrolment for workers in a pension scheme from 2012, establishing the National Employment Savings Trust.
Naismith said: “NEST will provide simple, good value pensions to those who do not currently have easy access to pensions, and will complement existing provision.”
Other announcements included a £1.5bn package of government support for customers of the collapsed firm Equitable life and the launch of a Green Investment Bank with £1bn of government funding.
© Fair Investment Company Ltd