U.K. 2011 Budget: Love it or Hate it?

A few days ago, Chancellor George Osborne (no relations to Ozzy) delivered the U.K.’s 2011 annual budget on behalf of the Office for Budget Responsibility (OBR).

Being a once-a-year event, this naturally drew a lot of feedback from the markets. But unlike the cast of Jersey Shore, which I’m sure we can unanimously agree to hate, the U.K.’s 2011 budget had bits for us to love and loathe. Let’s start off with the good bits first, shall we?

Don’t hate… Appreciate!

To fulfill the government’s vow to promote growth and business activity, it will be implementing softer taxing on an individual and corporate level. Individuals will enjoy larger personal tax allowances, while the corporate tax rate will be cut by 2% starting next month.

The U.K.’s goal is to be the best place in Europe to grow a business. Hey, if you’re gonna set goals, it’s best to aim high, right? It plans to achieve this by lowering its corporate tax rate by 1% for the following three years until it hits 23%. It also has a program in place to promote entrepreneurship and small businesses through research and development incentives.

To help protect consumers from rising gas prices, fuel duty has been lowered by 1 pence per liter, a nice turnaround from the 4 pence per liter increase that the government was contemplating at one point.

All in all, Osborne reported that the OBR, with its austerity plans, is still on track to meet its target of balancing its current account and lowering debt as a percentage of GDP by 2015.

You’ve got to hand it to Osborne. He certainly knows how to deliver on his promises, I’ll give him that.

The Sneaky Bad Bits

Sneaky man

Osborne delivered his speech with a lot of swagger and pride, and it would’ve been easy to get carried away by his upbeat tone. But ole Forex Gump sees right through his veil of flowery words!

In his speech, Osborne declared that GDP growth should improve nicely from 2013-2015. But more importantly, he also said that “the annual forecast for 2011 has been revised to 1.7%.” Aha! An interesting choice of words there, Mr. Osborne.

Funny how you avoided saying that this forecast was revised DOWN from 2.1%. And if I’m not mistaken, the OBR also downgraded its growth forecast for 2012 from 2.6% to 2.5%, right? It looks to me that while Osborne and his men are suggesting better times in the far horizon (2013 onwards), they seem to be undermining the tougher times directly ahead.

It was also mentioned that unemployment will peak this year, which could mean that the unemployment rate may rise above 8.0%… for the first time this millennium! Call me crazy, but could the government’s austerity plans have something to do with this? After all, the government does plan to cut almost 500,000 public sector jobs by 2014, doesn’t it? Guilty!

Another interesting point that was brought up was that the government has plans to “purchase a range of high-quality assets.” Wait a second… Buy more assets? Sounds like more quantitative easing to me!

Further easing just highlights the weakness in the economy, and basically means that it isn’t ready to get off its crutches yet. With that in mind, it’s unlikely that we’ll see the Bank of England change its stance soon. In other words, it may be a while before we see a rate hike from Mervyn King and his men.

The Verdict

I’ll have to side with the markets on this one. There’s a reason the pound sold off sharply after the budget was released.

Take another glance at the list of good points discussed above. If what you read sounds familiar, it’s because it has already been said before! We already knew that the government had plans to lower taxes and promote economic activity. It had been promised long ago. As such, anything short of what was actually said and delivered in the budget release would have been extremely disappointing.

Now take a look at the bad points. Is it just me or are things actually getting worse for the U.K.? Thursday’s disappointing retail sales report, which revealed a worse-than-expected decline of 0.8% seems to agree with me.

From this angle, I think the bad news outweighs the good in the U.K. budget release. So I’m sorry, U.K. budget, you ain’t getting no love from me!

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