Are we still on the right course?

In the Budget speech yesterday, George Osborne delivered a fairly punchy statement, and one that may help sustain the very fragile recovery in the UK economy.
The increase in the Personal Allowance from £7,475 to £8,105 from next month and £9,205 in April 2013, should put a little more in consumer's pockets, so this may be marginally good news for the beleaguered High Street. Of course, those consumers will be paying more to fill up their cars from August, with the 3p increase in fuel duty confirmed, which will negate some of the positive effect. Also, the freezing of the age allowance, whilst not a tax hike on the elderly, may have an adverse effect on those whave retired or are nearing retirement.

In terms of the bigger picture, the UK economy is in a little better health than a year ago, and slow but steady progress appears to have been made. Borrowing in the 2011-12 is expected to be £126bn, £9bn than the year previous and a little ahead of estimates. There will also be a further boost to the public purse when the Royal Mail Pension Plan transfers to private ownership. George Osborne expects Consumer Price Inflation to fall below the 2% target by the end of 2012 (which, in my opinion, may be a little optimistic due to oil prices) and has reaffirmed the 2% level as being the long term target for the Bank of England, together with a continuation of the Asset purchase programme in the 2012-13 Tax Year.

Osborne has also signalled the possibility of the Debt Management Office issuing Gilts with a duration of greater than 50 years, and even possibly irredeemable, to lock in to the low Gilt yields at present. This seems a prudent move, though much depends on the ability for the UK Government to retain the AAA status from credit rating agencies, which is currently under threat.

Overall, for thematic investors, I do not believe the Budget included any profound changes. Clearly there was no shift in the policy of low inflation, low interest rates, and I continue to expect Base Rates to stay unchanged to at least 2013. Consumer stocks may benefit slightly from the tinkering with the personal allowances, but for Equities, I continue to favour defensive positions. Steady as she goes, at least for the time being, although factors beyond the control of either the Government or Central Banks, such as a further spike in oil prices, could yet jolt the fragile recovery.