The UK Budget and the Economy

The key to understanding the impact of today’s budget on the real economy is found in the Chancellor’s comment right at its beginning that it would be a ‘fiscally neutral’ budget.  In short, that means that whatever measures he introduced to, say, cut taxes or duties would be exactly offset by others that increased revenues or reduced spending.  On balance, no net direct impact on total demand over the planning horizon of five years up to 2017/18, but perfect for the next election.

If you look at the Treasury table that analyses the net affect of all today’s measures http://www.hm-treasury.gov.uk/budget2013_policy_decisions.htm, you will see that in this year there is actually a net withdrawal of money to the tune of £1.3 billion mainly driven by spending cuts.  Even though he has removed the fuel escalator due in September and given something back to beer drinkers, the Budget for this fiscal year will contract the contribution of government spending on the economy.  In 2014/15 as many of the measures announced today come into effect such as the Employment Allowance of £2000 and various measures for home-buyers this becomes a net input to the economy of £1.6 billion.  In the following year, as the new Child Care scheme starts to be phased in, there is a net injection of some £2.8 billion.  In the following two years we return to withdrawals of £1.7 billion and £1.3 billion per annum.

One objective the Chancellor has achieved is

RBS - the price and everything, the value of nothing

So, the market is continuing to try and work out the value of RBS in light of their results published last week.

The RBS interpretation was that they were on track for re-building the bank.  Their share price had been improving over the last year as they gradually started to address their ills under new CEO, Stephen Hester.  He pointed to the improving 'under-lying' profits of their 'core' business' as an indicator of good things to come.  This seemed to confirm the idea that the bank would be ready to re-privatise over the coming 12 to 18 months.

The fact that there had been a fairly small improvement in operating profits, was not good enough for the markets.  That profit was turned into a huge net loss after adjustment for a variety of fines, provisions and adjustment for market based credit spreads.  And it is this net profit that seems to have driven market sentiment since last Thursday's figures.

The gap between the RBS share price and the target price of £5.00 that most feel would be needed to justify a re-privatisation has been widening.  Last Wednesday's price had been hovering around £3.45 for some time and had actually been rallying in advance of the results.  The disappointment of Thursday saw an immediate down grade as the results were released and have fallen even further threathening to fall back below £3.00.

Their share price needs to surge by 66% over the coming year to make it a real candidate for re-privatisation or at least need to be in sight of that price to announce a sell-off.  If last week's results were meant to show that there was light at the end of the tunnel it must be disappointing to all involved that the market decided to make the size of the task even bigger.