UK Budget: Summertime Love

The other big surprise announcement was the introduction of a National Living Wage. Essentially firms are being asked to make good the reductions in work-related benefits. The size of this intervention is large – workers on the current minimum wage will see a 7.5% increase from April 2016. The question will be how firms react over time. For the Bank of England, looser fiscal policy and an intervention that raises wage costs will need careful examination. It could make a more compelling case for a tightening in monetary policy. If things turn out badly globally, a looser fiscal policy could be fortuitous.

Rates: Sizeable cut to future financing projections

Although today’s £3.5bn cut to 2015-16 gilt issuance is smaller than expected (UBS’ forecast for a £6bn reduction was at the conservative end of market expectations), the outlook for future years’ gilt supply now looks considerably more favourable than in March. While short and medium gilts have richened on asset swap amid a strong safe- haven bid following developments in Greece, we wonder if the more upbeat outlook for public finances could trigger some catch-up on this metric for longs.

Banks: Modest tax rises for UK banks, and changes to buy-to-let economics

The bank levy reduction and tax rate increase for the UK banks brings a small net drag in the medium term (c2% of sector profits). However, in the long term the scope of the bank levy is being limited to domestic balance sheets, which could benefit HSBC and Standard Chartered, and de-intensify the re-domicile debate. Small UK banks will also be disproportionately impacted from having to pay higher taxes without offset from a lower bank levy. Changes to tax treatment for landlords could also impact the economics of individual buy-to-let customers. Some clarity has also been provided on the sell-down of the Lloyds and RBS stakes.