Chancellor Micawber - Result Misery

"Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds nought and six, result misery."

John Hamilton, manager of the Jupiter Corporate Bond Fund said "A mere six months ago in his Pre-Budget Report, the Chancellor jettisoned adherence to the 'golden rule' and predicted the economy would contract between 0.75% and 1.25% in 2009 followed by a modest rebound in 2010. The 2009 forecast has been revised down to a contraction of 3.5%. His former estimate now looks so wide of the mark as to cast serious doubt over today's optimistic forecast of +1.25% growth next year and +3.5% in 2011. Even Pollyanna could be forgiven for being cynical. The country may well have a different Chancellor by next summer - so why believe such forecasts today?

"To my mind, the key aspect of this Budget is how realistic the Chancellor's appraisal of the dire economic situation is perceived to be. If the Treasury's assessment of how much it needs to borrow is considered to lack credibility then long-term interest rates will go up and inflation expectations will rise. The immediate response of markets saw the pound fall by 1.5% against the dollar and the euro, while ten year gilt yields rose and the yield curve steepened as the Chancellor said the government would borrow £226bn more than forecast over the next four years.

"Tellingly, there is, on average, negligible fiscal tightening in later years. The Chancellor appears to be leaving responsibility for public sector cuts to the next government. Likewise, the absence of a major near-term fiscal stimulus to support corporate liquidity and protect jobs while the financial system heals is lacking - presumably because it would undermine market confidence in UK economic management. The lack of a fiscal stimulus when it is most needed is a major policy failure. "Last November, the Chancellor said Public Sector Net borrowing would peak at £118bn in 2009/10, falling to £105bn and £87bn in the following two years. The massive loss of tax revenue from income tax, corporate tax and VAT must now be replaced with higher borrowing.

"Markets were already expecting gilt sales to be as much as £50bn more than the £148bn estimated in the Pre-Budget Report. In actual fact, with gilt issuance now set for £220bn, markets now have to accommodate an extra £72bn over and above the amount the Debt Management Office had said. That's a big increase. "Estimates for borrowing in the succeeding years remain staggeringly high at £173bn or 11.9% of GDP (2010/11), £140bn or 9.1% of GDP (2011/12), £118bn or 7.2% of GDP (2012/13) and £97bn or 5.5% of GDP (2013/14). The government is relying on a typical economic recovery to reduce borrowing in the years ahead. That apart, there is no coherent plan to stabilise the country's finances.

"In addition to further borrowing, the government's "risk" position in respect of its numerous insurance and guarantee schemes needs to be considered. Because these are not associated with direct injections of large cash sums, they are easier to slip past political commentators. These measures will nevertheless be weighed up by investors. These are murky waters. Expect markets (including international investors) to pay close attention to the success or otherwise of forthcoming gilt auctions."

John Hamilton, Fund Manager, Jupiter Corporate Bond Fund

NOTE
Jupiter Unit Trust Managers Limited (JUTM) and Jupiter Asset Management Limited (JAM) are both authorised and regulated by the Financial Services Authority and their registered address is 1 Grosvenor Place London SW1X 7JJ. They are both subsidiaries of Jupiter Investment Management Group Limited and the group is collectively known as "Jupiter". The above commentary represents the views of the Fund Manager at the time of preparation and may be subject to change and this is particularly likely during periods of rapidly changing market circumstances. Their views are not necessarily those of Jupiter and should not be interpreted as investment advice. Every effort is made to ensure the accuracy of any information provided but no assurances or warranties