Q&A on the Chancellor’s Summer Statement
1. What is the main takeaway from the Chancellor’s statement?
Last week the Prime Minister focused on build, build, build. Today, for the Chancellor, it was jobs, jobs, jobs as he outlined an ambitious and interventionist suite of measures to prevent a rise in unemployment. The measures were significant, estimated by the Treasury to be worth up to £30 billion.
The last time the UK had high unemployment was in the early 1980s. Then the labour market was very different, ‘sclerosis’ being the word used to describe it. Now, the labour market is flexible. Also, in the 1980s high unemployment was a consequence of a necessary restructuring of the economy. Today, however, the deep recession and the threat to the jobs outlook is from an economic shock.
It is this that helps explain why the Chancellor should feel confident that his measures will be effective in limiting the scale of the rise in unemployment, although not in saving all jobs. His focus was on helping ensure the recovery continues, as well as specific measures aimed at the young and also focused on sectors in difficulty.
The threat to jobs is likely to seen in three waves: first, on the impact as the Government’s existing schemes are phased out; second, as the vaccine gap prevents a number of sectors from returning to normal with people reluctant to venture out and spend and as social distancing prevents businesses from returning to normal; and a third possible wave is when firms emerge from this crisis with high debt that forces them to then deleverage and not invest and recruit staff.
Today, the Chancellor announced action on the first two, and made clear in answering a question from the Chair of the Treasury Select Committee that he will address the third area later. It is this last group, covering many small firms, that may need help through a coronavirus fund to convert debt into equity.
Today’s measures included: £4.1 billion on a temporary cut in VAT, as explained below, from 20% to 5% to help the food, accommodation and tourism sector; £0.5 billion on a voucher scheme to eat out at a discount during August; £3.8 billion on cutting stamp duty to zero on house purchases of below £500k up to the end of March 2021.
Meanwhile, specific jobs measures included: a Job Retention Scheme with £1,000 to be paid to the employer for each job that is retained (a possible £9.4 billion cost); a kickstart scheme costing £2.1 billion aimed at employing young people and a £1.6 billion apprenticeship scheme.
2. What is the outlook for the economy following this statement?
At the beginning of his Statement, the Chancellor highlighted the scale and swiftness of the recession, with the economy contracting in two months by 25%, having previously taken 18 years to grow by this size. The unlocking of the economy is already contributing to a significant, and swift, economic rebound. The same is evident in many other countries, too. Thus, we should be optimistic about growth prospects, over the remainder of this year and into next.
However, while many sectors will rebound quickly, this will not be true for all, particularly in areas like the arts and the creative sector as well as sectors like hospitality and tourism. During the vaccine gap phase, with social distancing, it will be hard for these sectors to return to normal. Hence, the Chancellor’s timely, targeted, and temporary measures aimed at these areas. Help to the arts sector was announced at the start of this week, and tax cuts were unveiled today to help other areas.
These were welcome, and reinforce our existing view that the level of the economy will not return to its pre-crisis level until the end of next year, but even then unemployment will likely be higher, even taking into account today’s welcome measures.
3. How will we pay for this crisis?
The UK will emerge from this crisis with a huge burden of debt. This is consistent with the global trend, where the IMF has pointed out that public debt is at an all-time high. The UK’s debt to GDP ratio will be above 100%. Such a high stock of debt leaves the UK vulnerable to future economic shocks, and thus it is necessary to have a clear, credible plan to reduce this debt overhang, steadily over time.
However, there is no need to panic. We are in an environment of low inflation, rates and yields, which has reduced the debt servicing costs considerably and is creating a strong appetite among investors to buy government debt. The UK has ruled out austerity. Today the Chancellor announced specific tax cuts. In the future, however, he also needs to rule out significant tax increases. This has not happened yet, and it is always possible that specific tax measures may be unveiled, as touched on in answer 4 below. Instead, the focus will be on stronger economic growth to reduce the ratio of debt to GDP.
Personal finance implications
4. The Chancellor unveiled some tax changes. What were they and what are implications for taxes in the future?
There were only two changes to taxation announced, firstly a cut to VAT for the hospitality, accommodation and tourist attraction sectors from 20% to 5%, lasting from 15th July to 12th January 2021. For the hospitality sector this will apply on sales of food and non-alcoholic drinks in restaurants, pubs, bars and cafes.
Secondly, a temporary increase in the nil rate band of residential stamp duty land tax in England and Northern Ireland from £125,000 to £500,000, which we discuss in more detail below.
Both these tax cuts should provide a welcome boost to two of the hardest hit sectors of the economy. However, the brief mention by the Chancellor of the main Budget in the autumn, and a need to balance the books in the future, may signal that over the coming years we are more likely to see a series of tax rises to help pay for all of the support packages provided over this difficult period for the economy.
5. What about pensions and personal investment?
Inevitably, this will focus attention on the tax treatment of pensions as we approach the Budget later this year.
There were no changes announced to pensions or personal tax rates, as any previous plans this government may have had to reform this area have been blown out of the water. However, it’s still an important area for clients to focus on in order for them to get better net returns and achieve their goals.
There have been a number of changes this tax year which may increase the level of tax-free savings you can make. For example, earlier this year the Chancellor increased the threshold for tapering of the annual pensions allowance. This essentially provides the opportunity for some higher earners to put more into their pensions while receiving tax relief than was possible over the last few years. You can find out more about these recent changes in our short update webinar here.
Similarly, JISA allowances were increased significantly to £9,000 per annum and so you can now make more tax-efficient savings for your children each year.
6. What were the changes the Chancellor announced to stamp duty? How might this impact house prices?
The first £500,000 of house purchase transactions are to be exempt from stamp duty.
This would result in a reduction of stamp duty payable of £15,000 for any property over £500k. The example below looks at a purchase of a £1m property:
This should provide a boost to the housing market which had been weakened substantially by uncertainty over the future economic picture. While price falls have been modest, the number of transactions fell drastically during the lockdown and should now pick back up as purchasers look to benefit from this reduction in stamp duty by moving before 31st March 2021.
Financial markets and rates
7. What is the possible implication for financial markets?
Markets offered a muted response to the different measures announced today, with sterling barely moving against other major currencies. This suggests that the potential economic benefits for the broader economy had already been digested and discounted. Bond markets were also resilient against more fiscal largesse. In less extreme times, investors might question the impact that deteriorating national finances would have on borrowing rates, but the bar for surprise is set high in 2020.
In equities, the Chancellor received a positive response from the sectors directly targeted by his measures. Homebuilders, Real Estate Investment Trusts and hospitality companies all understandably showed positive performance after his speech. However, it remains to be seen if the broader market will benefit from a more confident UK consumer or indeed, if appetite for UK equities among international investors will return following marked underperformance in recent months.
8. Will the Chancellor’s statement have any impact on monetary policy and interest rates?
Monetary policy will remain supportive and accommodative. That means short-term policy rates will remain low for some considerable time. At their recent meeting the Bank of England announced further quantitative easing, of £100 billion. The Chancellor’s latest measures should not directly impact the immediate outlook for monetary policy and provide further evidence that in this crisis, much of the policy stimulus has been carried out by fiscal policy.
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