Autumn Statement focuses more on politics than personal finance

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Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.

U-turns, new levies on second homes and infrastructure spending plans dominate the headlines after George Osborne’s Autumn Statement and there are a number of things you need to know when it comes to both your personal finances and your investment portfolio.

Your money

The Chancellor’s Parliamentary statement largely glossed over the realm of personal finance, as the focus was very much on the economy, the spending review and the national debt.

There are five things to note when it specifically comes to your personal finances. Some of these are hidden in the small print in the document and weren’t mentioned in today’s speech in Parliament.

•    The big disappointment is that the annual allowance for Individual Savings Accounts (ISAs) and Junior ISAs will be left unchanged for the new tax year that starts in April. This means the maximum contribution will still be £15,240 and £4,080.

•    More encouragingly, the Government will legislate to ensure that unused drawdown funds are not subject to Inheritance Tax (IHT) on death. This is being backdated to 6 April 2011, when flexible drawdown came in. That was the first point when someone had the realistic option of withdrawing their entire drawdown fund. Choosing not to do so could be treated as reducing the value of an estate on death but that is unlikely to be the motivation of not drawing down funds and so it is good to see the Government confirm the IHT position.

•    Policy holders will be allowed to sell their annuities for cash in a secondary market by the Finance Act in 2017.

•    On a related subject, the Government’s response to the pension tax review will be released alongside the Budget in 2016. We will find out more about whether there will be a change in tax reliefs, annual allowances or how contributions to and withdrawals from pensions are taxed.

•    Finally, the Peer-to-Peer lending – or P2P – ISA has been delayed until autumn 2016.

There are two other items to bear in mind which may affect some of you. Both related to second properties and buy-to-let:

•    Capital gains tax on the sale of any second residential property will have to be paid within 30 days, as part of a drive to improve tax collection

•    Purchases of second homes or buy-to-let properties will attract an additional three percentage points in stamp duty, over and above the thresholds outlined in April’s Budget.

Your investments

Investment-wise, the FTSE 100 seems fairly relaxed as it held on the healthy initial gains during Osborne’s one-hour-plus speech.

Defence-related stocks such as BAE Systems and Babcock have already flown, amid the widely trailered increase in the national defence budget from £34 billion to £40 billion by 2020-21.

Defence stocks had already rallied going into the Autumn Statement

Defence stocks had already rallied going into the Autumn Statement

Source: Thomson Reuters Datastream

NOTE: Past performance is not a guide to future performance and some investments need to be held for the long term.

The main movers were house builders and infrastructure stocks in response to George’s Osborne’s “build for Britain” plans.

As the Chancellor spoke, Taylor Wimpey and Persimmon jumped to near the top of the FTSE 100 leader board, helped by the Government’s renewed commitment to increasing the supply of new dwellings in London and across the UK. 

This helped reverse a summer swoon in the sector, which came amid fears of shortages of land, skilled staff and cost inflation.

House builders welcomed the Autumn Statement

House builders welcomed the Autumn Statement

Source: Thomson Reuters Datastream

NOTE: Past performance is not a guide to future performance and some investments need to be held for the long term.

It was a similar story at brick-maker Michelmersh, which soared by more than 6% on the day.

Brick-maker warmed to Government plan to double its housebuilding budget to £4 billion

Brick-maker warmed to Government plan to double its housebuilding budget to £4 billion

Source: Thomson Reuters Datastream

NOTE: Past performance is not a guide to future performance and some investments need to be held for the long term.

Infrastructure-related plays also enjoyed gains as investors reflected on the Chancellor’s £61 billion commitment to boosting Britain’s roads, railways and flood defences. WS Atkins was up 3% while Balfour Beatty and AIM-quoted tiddler Renew Holdings advanced by 2%.

Infrastructure spending plans boosted support services and construction plays

Infrastructure spending plans boosted support services and construction plays

Source: Thomson Reuters Datastream

NOTE: Past performance is not a guide to future performance and some investments need to be held for the long term.

Other points to note, buried deep into the actual Autumn Statement document include:

•    Confirmation of the Government’s plans to reduce its stake in Lloyds to zero, with an offer to retail investors which features a bonus for those who buy shares and hold them for at least a year.

•    An ongoing commitment to sell £25 billion in Royal Bank of Scotland shares over the course of the 2015-2020 Parliament (or some £5.8 billion a year) and an additional £5.8 billion by 2020-21. 

The economy

Ultimately, Mr Osborne’s real focus was the economy and his spending review. The Office for Budget Responsibility (OBR) marginally upgraded its forecasts for UK GDP growth for 2016 and 2017, leaving 2015 unchanged. 

OBR expects steady GDP growth

OBR expects steady GDP growth

Source: Thomson Reuters Datastream

NOTE: Past performance is not a guide to future performance and some investments need to be held for the long term.

The OBR also ratified the Chancellor’s plans to get the UK back into an annual budget surplus by 2019-20, ending a horrific run of deficits.

The Chancellor is still targeting an annual budget surplus by 2019-20

The Chancellor is still targeting an annual budget surplus by 2019-20

Source: Office for Budget Responsibility

NOTE: Past performance is not a guide to future performance and some investments need to be held for the long term.

However, even these welcome gains – if attained – still barely make a dent in the UK’s aggregate national public debt, which still exceeds £1.6 trillion, so Government claims the national debt is coming down need to be treated carefully.

UK’s total national public debt is still growing 

UK’s total national public debt is still growing 

Source: Thomson Reuters Datastream

NOTE: Past performance is not a guide to future performance and some investments need to be held for the long term.

That said, the UK gilt market was largely unmoved by the Autumn Statement. The yield on the 10-year paper rose slightly to 1.88% while the yield on the 2-year, often seen as a proxy for the Bank of England’s headline interest rates, increased a touch to 0.626%. 

UK Gilt market was largely unmoved by the Autumn Statement

UK Gilt market was largely unmoved by the Autumn Statement

Source: Thomson Reuters Datastream

NOTE: Past performance is not a guide to future performance and some investments need to be held for the long term.

The long-run trend here has been higher since spring, so the bond market is seemingly pricing in greater inflation, higher interest rates or both.

Politics and the big picture

Politically, the £4.4 billion reverse on cutting tax credits is be the big story but the Chancellor of the Exchequer found himself with £27 billion in the kitty.

This gave him plenty of room for manoeuvre when it came to spending on defence, the NHS and infrastructure and the additional cash came from four sources:

•    Lower spending at several Government units, including the Departments of Energy and Climate Change, Transport, Business Innovation and Skills. The table below outlines the net impact of the Government’s policy decisions, savings relative to spending.

Autumn Statement featured large spending cuts at Government departments

£ million 2015-16 E 2016-17 E 2017-18 E 2018-19 E 2019-20 E 2020-21 E
Total policy decisions 280 -1,965 2,815 4,295 6,220 6,420
Of which: welfare policy cap decisions -5 -2,970 -1,920 -670 140 290
Total tax polIcy decisions 335 585 4,545 4,620 5,520 5,335
Of which: apprenticeship levy 0 0 2,730 2,845 2,970 3,095
Spending review: savings from Departmental resource budgets 0 600 4,400 8,400 12,200  

Source: HM Treasury, Spending Review and Autumn Statement 2015

NOTE: Past performance is not a guide to future performance and some investments need to be held for the long term.

•    Increased tax receipts, presumably helped by a better economy but also improved collection. This theme of greater vigilance will remain strong, given Government plans to digitise the tax process and provide businesses and individuals with their own digitised tax code from 2019. Mr Osborne clearly believes the £800 million investment here will reap rewards.

•    Lower inflation calculations and assumptions from the Office of Budget Responsibility (OBR). 

•    Lower interest rate assumptions from the OBR.  

Given this final benefit, it will be interesting to see just how quickly Bank of England Governor Mark Carney does move to increase the headline interest rate from its historic low of 0.5%. 

Not very is probably George Osborne’s preference. Even if the Old Lady of Threadneedle Street is entirely independent it is hard to see Carney rushing to jack up interest rates and the Chancellor seems to agree. 

After all, back in March the Government saw fit to repay the £1.9 billion, 3.5% War Loan bond which dated back to 1917 (via a coupon cut in 1932). 

OBR expects interest rates to remain lower for longer, placing a premium on reliable income for investors

OBR expects interest rates to remain lower for longer, placing a premium on reliable income for investors

Source: Thomson Reuters Datastream

NOTE: Past performance is not a guide to future performance and some investments need to be held for the long term.

Mr Osborne clearly saw this as an expensive loan and one worth repaying. That in turn implies he thinks interest rates will remain a lot lower for a lot longer and the OBR’s November economic outlook paper expects the Bank of England base rate to still reside below 2% by 2020-21. 

This is something investors who are looking for income, from equity dividends or bond coupons, should perhaps bear in mind.

Russ Mould

AJ Bell Investment Director


The daily market update is written by Russ Mould, AJ Bell’s Investment Director and his team. The article highlights the movement in the main index, winners and losers on the day and any macro-economic announcements.