Budget surplus? Get a reality check

Important Information

We want to make investing with us simple and straightforward for all of our clients.

Please select your investor type from the options below.

Alternatively you can register or log in to an existing account.

Please note that by making your selection here you are agreeing to the Woodford Investment Management Ltd Privacy Statement and to our Terms and Conditions.

Neil Woodford 18 March 2015 Est. reading: 3 min read

We have believed for some time that the growth and inflation assumptions embedded in the forecasts of central banks around the world, are consistently too optimistic. In the case of the UK, this applies also to the Office for Budget Responsibility (OBR).

The forecasts released by the OBR today, and the views expressed by Chancellor George Osborne in the Budget are not consistent with our views at all. So although the claims of a return to a budget surplus by 2018-19 for the first time in 18 years will make great headlines – and may sound attractive to potential voters – we believe a dose of reality is required.

The chart below, shows the path of the budget deficit according OBR assumptions, of real GDP growth of 2.3-2.4% per annum over the next five years which, with inflation assumed to return to over 2% by the end of this period, means nominal growth of 5.0% by 2019-20.

Graph: showing UK budget deficit with adjusted assumptions

However, you don’t have to flex these assumptions very much at all, to get a glimpse of a much more difficult fiscal environment. What if growth fails to remain at these levels? What if inflation fails to return to the Bank of England’s 2% target? In our view, these are both realistic concerns, so we have added what we believe are more realistic forecasts, using adjusted assumptions.

Between 2010 and 2014, the average real GDP growth delivered by the UK economy was 1.8% per annum. We have therefore incorporated this real growth rate into the adjusted model. Similarly, we see no reason to expect inflation to return to 2% per annum any time soon and have incorporated 1% per annum into this more realistic set of assumptions (indeed this may prove to be far too optimistic a view of inflation).

In doing so, we can see that, although the deficit continues to reduce, it does not do so at the same pace, nor does it end with a budget surplus by 2018-19. Indeed, this more realistic scenario results in a cumulative hole of over £120bn in the UK’s public finances.

We conclude that there is no room for complacency on the UK economy. We believe it is appropriate to be cautious about the UK economic outlook, as indeed we are about the global outlook. There was nothing in the Budget to warrant a change to this cautious view in the near-to-medium term.

On a brighter note, however, there were some very supportive initiatives designed to help the long-term development of the UK’s ‘knowledge economy’.

The Government aims to give the UK’s world-leading research institutions greater freedom in which to continue to develop cutting-edge technologies. It also wants to ensure that regulations do not restrict innovation and, in particular, the development of disruptive technology.

We passionately believe that it is through the development and commercialisation of new, disruptive technology that we can hope to break free from the post-financial-crisis economic stagnation that currently afflicts the western world. Any support for the knowledge economy should be welcomed as it allows a more optimistic view of our long-term economic prospects.

What are the risks?

  • The value of the fund and any income from it may go down as well as up, so you may get back less than you invested
  • Past performance cannot be relied upon as a guide to future performance
  • The ongoing charges figure is charged to capital, so the income of the fund may be higher but capital growth may be restricted or capital may be eroded
  • The fund may invest in other transferable securities, money market instruments, warrants, collective investment schemes and deposits – some of these security types could increase the fund′s volatility and increase the level of indirect charges to which the fund is exposed
  • The fund may invest in overseas securities and be exposed to currencies other than pound sterling – as a result, exchange rate movements may cause the sterling value of investments to decrease or increase
  • The fund may invest in unquoted securities, which may be less liquid and more difficult to value, because they are generally not publicly traded – the lack of an open market may also make it more difficult to establish fair value

Important information

Before investing, you should read the Key Investor Information Document (KIID) for the fund, and the Prospectus which, along with our terms and conditions, can be obtained from the downloads page or from our registered office. If you have a financial adviser, you should seek their advice before investing. Woodford Investment Management Ltd is not authorised to provide investment advice.

The Woodford Funds (Ireland) ICAV (the “Fund”) has appointed as Swiss Representative Oligo Swiss Fund Services SA, Av. Villamont 17, 1005 Lausanne, Switzerland. The Fund′s Swiss paying agent is Neue Helvetische Bank AG. All fund documentation including, Prospectus, Key Investor Information Documents, Instrument of Incorporation and financial reports may be obtained free of charge from the Swiss Representative in Lausanne. The place of performance and jurisdiction for all shares distributed in or from Switzerland is at the registered office of the Swiss Representative. Fund prices can be found at www.fundinfo.com.

Woodford Investment Management Ltd is authorised and regulated by the Financial Conduct Authority (firm reference number 745433). Incorporated in England and Wales, company number 10118169. Registered address 9400 Garsington Road, Oxford OX4 2HN.

Woodford Patient Capital Trust plc is incorporated in England and Wales, company number 09405653. Registered as an investment company under section 833 of the Companies Act 2006. Registered address Beaufort House, 51 New North Road, Exeter, EX4 4EP.

© 2019 Woodford Investment Management Ltd.
All rights reserved.

Are you sure?

By disagreeing you will no longer have access to our site and will be logged out.

Privacy Preference Center

Experience Tracking

Lets our analytics service track you across our different websites and enables data sharing among our different marketing tools.

AMCV_[Tracker ID]@AdobeOrg (Adobe), [Tracker ID]@AdobeOrg (Adobe)
Adobe Analytics (helps us provide you with more relevant experiences and content based on your likely interests). Cookies: demdex, dextp, dpm, DST, DSTJS
Twitter personalisation (by better understanding how devices are related, Twitter can use information from one device to help personalize the Twitter experience on another device). Cookies: personalization_id
Heap Analytics (provides metrics on user behaviour and actions throughout the site). Cookies: _gid, _hp2_id.[Tracker ID],_hp2_props.[Tracker ID], _ga, _mkto_trk, optimizelyBuckets, optimizelyEndUserId, optimizelySegments, raygun4js-userid, _attribution_referrer, _csrf
Adobe Analytics (provides you with more relevant experiences and marketing messages based on your likely interests). Cookies: _tmae ,ev_sync_dd,ev_sync_yh,everest_g_v2,gglck

Traffic Metrics

Allows Woodford to aggregate information on website usage and popular content

_ga, _gid
Google Analytics (tracks and reports website traffic and user behaviour): Cookie: CONSENT
New Relic (application and server performance monitoring – allows us to spot problems with our website code and improve them to keep things running smoothly). Cookie: JSESSIONID
Adobe Analytics (provides you with more relevant experiences and marketing messages based on your likely interests). Cookies: __qca,__smToken, _ga, _mkto_trk, _rtbmedia

Search History

Populates the 'recent searches' section of the website navigation.

wf__recent_searches_untracked

Close your account?

Your account will be closed and all data will be permanently deleted and cannot be recovered. Are you sure?