Incentives at least acknowledge that investment is the problem
Manufacturers and exporters good; annuity providers bad. Rarely do budgets draw such a stark line across the business landscape – or provide so many opportunities for fast stockmarket traders.
Spending incentives for small and medium-sized business, in the form of a doubling of annual investment allowances to £500,000, exceeded even what the CBI had lobbied for.
As for big insurers enjoying a comfortable living selling annuities offering meagre incomes, this was a shocker. Legal & General's shares fell 8%; Resolution, the Friends Life group and Aviva were down 5%. By contrast, Hargreaves Lansdown, the DIY investment platform that will be an immediate beneficiary of substantially higher ISA allowances, soared 14%.
Eye-catching stuff and, from a business perspective, George Osborne got much right, given his limited scope for sweeteners. He is exposed to the charge that the recovery is little more than a housing-inspired mirage which has bypassed exporters. Levels of business investment have flat-lined at historically low levels even as GDP numbers have improved. Businesses' unwillingness to invest for growth is starting to look ingrained, rather than an issue to be blamed, repeatedly and unconvincingly, on weakness in the eurozone.
A doubling of capital allowances until 2015, then, at least acknowledges the problem. The measure, expected to cost £2bn, will not rebalance the economy alone – but it ought to bring forward some investment in plants and machinery. The CBI already had some punchy-looking forecasts for a rebound in business investment (6.6% in 2014 and 8.3% in 2015). There will be fewer excuses now if a higher level of investment does not materialise.
Meanwhile, the government – predictably – ignored any objections from the green quarter by freezing the carbon price and giving steel mills, paper plants and other heavy energy users substantially more relief. For business, the energy package looks significant. And the cut in tax on long-haul flights will be cheered in boardrooms (albeit not that of British Airways, which is rarely satisfied). Business got about 80% of what it wanted.
The exception was business rates, where the next revaluation in 2017 looks horribly distant for those high-street retailers and operators paying over the odds. The receipts, it seems, are simply too chunky for the Treasury to allow the current rates to be frozen until overdue reform arrives.
On pensions, the market's snap reaction was simple: providers will lose, thus the steep falls in life assurers' shares. That assessment was understandable – a policy on which there has been zero consultation with the industry usually spells trouble, especially when it's billed as the biggest shake-up since 1921.
The day two reaction, however, may be more nuanced. Yes, the likes of L&G and Aviva will obviously sell fewer annuities. That is bound to happen if pensioners in defined contribution schemes are no longer compelled to buy annuities. But they are far from being one-trick ponies.
L&G's book of annuities from defined benefit schemes, which are unaffected, will carry on regardless. And the fund management arms of the big insurers will hope to gather some of the newly liberated cash to manage. They will have to invent new savings and income products, which implies stiffer competition, but not every corporate provider will be a loser from Osborne's big announcement.
What's more, if the reforms achieve their intended purpose, Britons may actually save more before retirement, which they should. Yes, Osborne should get the sugar-rush of new pensioners spending more freely, which is what the official numbers project. The long-term impact, however, may be an increase in the pool of savings in the UK.
The obvious losers are companies offering only annuities and nothing else – thus the 55% crash in the share price of Partnership, a specialist in so-called "non standard" annuities for the ill, the infirm and smokers. Many of its future customers will surely be inclined to turn their pension pots into a lump sum and spend the cash or invest it elsewhere. That corner of the annuity market looks fundamentally changed for ever. For the rest, though, it's a matter of reinventing their business models.
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