Monday, December 05, 2005
Slower growth, but no humble pie
Posted by David Smith at 05:44 PM
Category: Thoughts and responses

In his pre-budget report Gordon Brown reluctantly admitted to a halving of his growth forecast to 1.75%, from 3%-3.5% in March. He also gave us a weakish forecast, of 2%-2.5% next year. That's in line with most independent forecasters but weaker than the Bank of England. If the Treasury's right that could mean lower interest rates.

Brown raised taxes, by £1.1 billion in 2006-7 and £2.2 billion in 2007-8, mainly thanks to an additional £2 billion tax on North Sea oil. Even so, there's plenty of extra borrowing - a cumulative £21 billion on the current budget in the period to 2009-10, most of that concentrated in the early years. In rough terms, borrowing is £5 billion more this year than was predicted.

This chancellor is incapable of delivering bad news. He criticised the Conservatives for a policy of restricting public spending growth below that of the economy as a whole. But that is exactly his policy from 2008 on, though you have turn to page 217 to find it - current spending will rise by 1.9% a year from then.

Given the excitement there has been about putting property in self-invested personal pensions, this paragraph in the PBR will generate a huge amount of interest:

"To prevent the potential abuse of the simplification rules, where people could claim tax relief in relation to pension contributions into Self Invested Personal Pensions (SIPPs) for the purpose of funding purchases of holiday and second homes for their or their family’s personal use, from 6 April 2006 SIPPs and all other forms of self-directed pensions will be prohibited from obtaining tax advantages when investing in residential property, and certain other assets such as fine wines. This action will ensure that tax relief is only given to those whose purpose in making the contribution is to provide themselves with a secure retirement income."

One other detail. Brown continued his pattern of finding jobs for former editors of the Financial Times. Andrew Gowers, who has just left the FT, will examine intellectual property in a digital age.



Posted by: gjhm at December 6, 2005 06:04 AM


Pressure gauge
Spiral disk heat interchanger
The chemical industry helps the medicinal preparation

Pah -it's still not a haiku!

But at least Gordon has had the sense to do a u-turn on property in SIPPs - 'to prevent the potential abuse'. Well, we can be sure the squeals of anguish that resulted have come mostly from those intending to abuse it to the hilt.

Having got that one right, Gordon then shoots himself in the foot with this extra tax on North Sea oil. What can he be thinking? Surely this is an invitation to BP and the like to spend their exploration and development budgets elsewhere. It wouldn’t be so bad if he’d applied the same ‘use it or lose it’ rule as for gas storage but oil companies can just leave North Sea oil in the ground and spend their money looking elsewhere. I hope he does another u-turn in March.

Posted by: Sandid at December 6, 2005 11:05 AM

I don't think we should underestimate the significance of this SIPPS U-turn.

For quite a while the first rung of the housing ladder has been supported not by first-time buyers (priced-out), but by property investors/speculators. In the past year or so, the maths hasn't really stacked up for property investors/speculators either as yields have been exceptionally low.

However, the expectation of a fillip to the market on A day has kept the boom going much longer than it really should have, and I suspect the U-turn on SIPPS could be the trigger for a significant and long-overdue correction.

Posted by: doogie at December 9, 2005 01:14 PM

Will the SIPPs U-turn remove a vital source of support from the housing market? I've never used this as an argument for predicting a soft landing, partly because of a suspicion that the Treasury would nip it in the bud, mainly because in macro terms the effect was always going to be small. Having said that, flats built by developers specially for the buy-to-let market were suffering before this and will suffer more now. But that won't drag the whole market down.

Posted by: David Smith at December 9, 2005 05:53 PM