Earlier today, Chancellor of the Exchequer Rishi Sunak delivered his second budget of the Covid-19 era. Against the backdrop of serious damage to the UK economy, Sunak said he would continue to do “whatever it takes” to keep the economy afloat and set about delivering on that promise.
Richard Flax, Chief Investment Officer at Moneyfarm, picks out the key points from the announcement and what they could mean going forward.
The government will continue to spend big
We’ll spare you the full list, but most COVID support gets extended – including the headline measures like furlough, stamp duty reduction, business rates, additional universal credit. It seems like the right thing to do, but there was always the question of when a Conservative Chancellor would try to balance the books. The answer is – not now. And that’s surely the right one.
The Chancellor was clearly emboldened by economic forecasts
The Independent Office of Budgetary Responsibility now expects the economy to get back to end-2019 levels by mid-2022 – a couple of quarters (roughly) faster than they had expected back in November. This is partly because the economy was a bit stronger in the fourth quarter than the Office for Budget Responsibility was previously expecting.
Sunak didn’t go near income taxes
The Chancellor left National Insurance, income tax rates, capital gains, etc. unchanged. He made inflation work for him, by freezing the limits on pension contributions and the Lifetime Allowance in nominal terms. It’s a bit of a stealth tax on high earners and savers, but it’s not terribly aggressive.
A corporation tax rise in two years’ time
The Budget’s big tax change was a hike in corporation tax from 19% to 25% from April 2023. Sunak cushioned the blow by protecting small businesses and making some adjustments to tax loss policies, but this is a pretty big increase, albeit from a relatively low level. The move to 25% would bring the UK closer into line with some European peers and the United States. It won’t make big corporates happy, but it’s not clear how much the UK has benefited from having such a low corporate tax rate in the past. And you’d guess it won’t be the last country to consider such a move.
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There were some nods to sustainability.
Sunak announced a new savings product to invest in green bonds (details to follow). He also announced that the Bank of England’s mandate would change to incorporate the target of net-zero emissions. It’ll be interesting to see what that really means and how that changes the behaviour of corporates and lenders. You’d also guess that the new Infrastructure Investment Bank will have a sustainability tilt as well.
Long-term forecasts aren’t so rosy
While the OBR may have helped the Chancellor in the short-term, their long-term forecasts will cause some concern. The OBR’s full report is some 220 pages long, so we won’t go through it in detail, but the headline is that 2023 – 2025 GDP growth is forecast to be around 1.6 – 1.7%, which isn’t great.
Part of the problem is a lack of investment spending, where the UK lags behind the rest of the G7, and Sunak came up with a few tax breaks to encourage that. However, raising sustainable GDP growth in the UK will be a multi-year endeavour.
What does this all mean?
When faced with such relative largesse from a Conservative Chancellor, the critics’ line is always ‘it’s not enough’. Inevitably, there’s some truth to that, given that we’ve seen the worst drop in economic activity in 300 years. Sunak didn’t solve the climate crisis and he didn’t announce unlimited funds for the NHS.
Ultimately, the government has decided basically to wait and see on the strength of the recovery. Large corporates will foot some of the bill, but only from 2023. You’d guess that this government (and the next couple as well) will need to increase taxes again if they want to keep debt to GDP flat (or better) in the later years of the forecast. For now, Sunak has resisted the temptation to cut spending too quickly, and focused instead on helping to support the recovery. That seems like a sensible approach and, inevitably, it’ll be seen in some quarters as too cautious. But it’s also worth remembering that an acceleration in inflation or rising bond yields could cause the Chancellor some headaches.