UK Budget: Stamp duty cut buys time for Hammond but can't hide challenges

The Chancellor of the Exchequer delivers giveaways to key policy areas despite worsening economic and fiscal outlook.


Azad Zangana

Azad Zangana

Senior European Economist and Strategist

Sue Noffke

Sue Noffke

Fund Manager, UK Equities

Alix Stewart

Alix Stewart

Fund Manager - Fixed Income

The economics view - Azad Zangana, Senior European Economist & Strategist, said:

"The inaugural Autumn Budget was meant to be a quiet affair when first conceived, but the result of the snap general election earlier this year made this event crucial not only for the government, but for the Chancellor himself.

"Under pressure to deliver a bold and positive vision of the UK’s future, the Chancellor, Phillip Hammond started the speech with an upbeat introduction of the economy defying the expectations of more negative forecasts, and promising to face challenges head on, seeking out opportunities.

"Unfortunately, the reality of this Budget shows the enormously difficult position the Chancellor is in.

Downgrades to OBR’s forecasts

"The headline from the Budget will be the large downgrades to the UK’s future path of GDP and productivity growth. The independent Office for Budget Responsibility (OBR) has downgraded its forecast for real GDP growth in each year of the forecast, with nominal GDP 2.5% lower by the end of the forecast horizon.

"This naturally led to a higher forecast for borrowing in coming years, with most of the Chancellor’s headroom removed.

Measures to support NHS and housing

"There was a small net fiscal giveaway in this budget too from the Chancellor, with most funding directed towards the National Health Service (NHS), measures to encourage greater investment, and housing.

"The NHS and housing had to be targeted by the Treasury as the public considers both these areas to be in crisis. An additional £1.6 billion will be given to the NHS next year, well short of the £4 billion plus requested by the service.

"For housing, £44 billion of funding and guarantees will be provided in coming years to support home building, but the Chancellor’s well-trailed “rabbit out of the hat” was abolishing stamp-duty for first-time buyers where the value of the home is £300,000 or less outside of London, and on the first £300,000 of a home valued at up to £500,000 in London.

"While the Chancellor’s efforts to boost housing supply should be welcomed and are long-overdue, the scrapping of stamp duty for first-time buyers (the majority of buyers in the market at any point in time) will likely serve to distort property prices further.

"Indeed the OBR has said that it does not expect the policy to help first-time buyers, but will help sellers.

Minimal changes to personal taxes

"Personal taxes were largely left unchanged, though personal allowances and the higher tax threshold will be increased from April next year. The now annual obligatory freeze of fuel duties was delivered, but new levies on diesel cars were announced.

"Otherwise, the national living wage will be increased by 4.4% from April, along with the national minimum wage, which now only applies to younger workers.

"Overall, this was not the bold, game-changing Budget that many in the Chancellor’s own party were demanding. However, Hammond’s giveaways may just about be enough to satisfy the headline writers, and keep him in his job for now."

The equities view - Sue Noffke, Fund Manager, UK Equities, said:

“Despite the Chancellor’s stamp duty announcement and commitment to £44 billion of extra funding for the housing market, homebuilders’ share prices are down a little this afternoon.

“The Help to Buy scheme, which has been a big support for the sector, is due to end in 2021. It remains to be seen whether the abolition of stamp duty for first-time buyer purchases up to £300,000 will be an additional boost to the sector, or ultimately replace the benefit that Help to Buy has until now provided.

“Investors currently appear to be underwhelmed by these housing market announcements. Until now, homebuilders have been in a great sweet spot thanks to relatively subdued increases in supply, robust demand, low interest rates and Help to Buy. Shares for the sector are up about 35% over the past 12 months so I think we are now seeing some profit-taking.”

The fixed income view - Alix Stewart, Fund Manager, Fixed Income, said:

“So far the gilt market seems unfazed by the Budget and sterling has held up pretty well.

“The OBR growth forecasts have been lowered by more than the market expected and Hammond is being more prudent on the Budget deficit than he might have been. This is resulting in less likelihood that the BoE will raise interest rates much more (if at all).

"In addition, gilt issuance, while a little bit higher than expected from 2019 onwards, isn’t too much to worry about.

“The downgrades of the UK’s productivity forecasts are also likely to offset any inflationary pressures from the increases in the National Living Wage, as will the freezing of duty on alcohol and air fares. Market inflation expectations were a little lower as a result.”