Analysis of the Budget
The latest Budget is naturally focused on recovering from the pandemic, with the Chancellor Rishi Sunak promising to do “whatever it takes” to support the UK economy. Here we provide an overview of some of the Budget’s key messages and what this may mean for investors.
The economic impact
Strong growth, leaner future public finances and a greener economy. These were some of the headline messages from Chancellor Rishi Sunak’s second Budget. The Chancellor continued with his policy of the last year, focusing on crisis management and using fiscal policy to provide support to the areas of the economy that needed it.
Tax increases are being delayed until 2023, after the economy has recovered, and will then focus on a freezing of income tax allowances and on raising corporation tax from 19% to 25%, with a lower rate for smaller firms.
The tax take, as a proportion of national income, will rise to its highest level since the 1960s. With inflation, rates and yields low, the debt dynamics mean that the Chancellor does not need to panic.
Equally, though, the fiscal numbers are sensitive to any rise in yields and a one percentage increase would cost the Chancellor £25 billion a year. Sensibly, therefore, the Chancellor avoided any new fiscal rules, as his predecessors have done, and instead he focused on fiscal principles, which effectively mean he will get the budget numbers back into shape but not until the economy has recovered.
Over the last year, fiscal policy has acted as the main shock absorber. Including measures announced today, the total Covid support is a massive £352 billion. The measures announced in this Budget alone add another boost to the economy of £6.1 billion in this fiscal year 2020/21, a mammoth £58.9 billion in the year ahead and a boost of £7.8 billion in 2022/23.
Then, as we approach the next general election, higher taxes lead to fiscal tightening of £13.1 billion in 2023/24, £25.0 billion in 2024/25 and £29.7 billion in 2025/26. Specific measures in the Budget included a generous ‘super deductor’ to boost investing, extending the furlough scheme to help keep the jobless figures down, a new mortgage guarantee scheme to help first time buyers and a range of measures to boost the green economy, including a new Infrastructure Investment Bank.
We expect the economy to rebound strongly over the next year. In turn this should allow the fiscal numbers to improve significantly and it would not be a surprise if it allowed the Chancellor to rein back on some of his planned tax hikes.
The official Office for Budget Responsibility forecast is for the economy to grow 4% this year and 7.3% next. They see the economy returning to its pre-crisis level by summer 2022. To put this into perspective, the economy at the end of this month will be back at the level of activity last seen in 2014.
There is nothing magical about that year but it just shows how weak things are now. But within 15 months the OBR is effectively predicting the equivalent of six years of growth, as by next summer the UK returns to its pre-crisis level that was seen in spring 2020. That is a solid recovery.
However, the OBR then predicts growth decelerating to only 1.7% in 2023, 1.6% in 2024 and 1.7% in 2025. Despite all the good news, the UK still lacks a longer-term economic strategy. For now, though, the markets will focus on the ending of both the health and the economic crisis, and the recovery ahead.
What it means for markets
In contrast to the backdrop of last year’s Budget when markets were falling sharply, today’s announcement reinforced the sense of optimism about taking exposure to UK growth. The shares of homebuilders and banks both rose due to favourable policies, while the domestic-focused FTSE 250 Index outpaced the multinationals of the FTSE 100 in the afternoon.
Both markets remain cheap relative to international shares, and a period of domestic growth should help attract more interest, and support share prices as a result.
Sterling has also responded well, holding its own against a strengthening US dollar, and continuing a good run of performance against the euro. The chancellor referenced the sharp moves seen in bond markets in recent weeks during his speech, and gilts were already weakening in sympathy with US Treasuries before he spoke.
Nothing in the new measures suggests that there will be a policy-driven change to the UK bond market following the direction of its peers.
Looking ahead, markets are already anticipating in the coming years the highest level of UK inflation since the eve of the global financial crisis. In our view, it will be key to ensure that portfolios are able to withstand greater levels of uncertainty on inflation. As sovereign bonds have sold off, market positioning has become heavily skewed to favouring credit risk over inflation risk in recent months.
This suggests that the bar has been raised for future surprises on this front, and it will remain a key area of focus for the Netwealth investment team.
The impact on personal finances
Despite much speculation in the media, there were relatively few changes of note today from a personal finance perspective. All of the major personal tax rates were left unchanged and the chancellor resisted the temptation to further fiddle with pensions. The main impact to be aware of is a freeze on most exemptions and allowances that had previously been due to rise by inflation. This means that until 2026 the following rates will apply:
- Income Tax Personal Allowance
- Income Tax Higher Rate Band will start at
- Capital Gains Tax Annual Exempt Amount
- Pensions Lifetime Allowance
While this will not result in more tax being due immediately it may impact on your longer- term planning as more of your inflated income becomes subject to higher rates of tax.
The ISA allowance remain unchanged at £20,000 for adults and £9,000 for Junior ISAs and child trust funds.
For those purchasing homes, the stamp duty nil rate band of £500,000 will be extended until 30 June with this reduced to £250,000 from 1 July to 30 September, when it will revert to £125,000.
While there were no major changes to personal taxation announced today, the scale of government debt does highlight the potential need for revenue raising measures in the future. This means, now more than ever, clients should try to make use of all of the personal allowances and planning opportunities available to them.
With the tax year end fast approaching make sure you have everything in order. Book a call with one of our advisers to discuss your tax allowances and our year end CGT service.
Please note, the value of your investments can go down as well as up.