Our Opinion: 2021

Rishi’s Recovery budget

The UK Chancellor of the Exchequer, Rishi Sunak, has had an exciting first year in the role. He spent most of 2020 figuring out ways to keep the UK economy afloat while various levels of lockdown came and went. In this month’s budget, we got some insight into how he plans to shore up both the recovery and the public finances. So what were the biggest moves?

The government has spent a lot of money in the past year to offset the impact of Covid-19 lockdowns. That’s set to continue until at least the end of September. Sunak announced the extension of the furlough and self-employment relief schemes, VAT cuts, stamp-duty holidays, business-rates relief, universal credit top-ups and various other measures, all of which added another £65bn to spending for the 2021-2022 tax year. That leaves us with overall borrowing for 2021-2022 at an estimated £234bn – a far cry from the £164bn forecast in November.

The good news is that the economy is expected to rebound strongly this year and next, growing by 4% in 2021 and more than 7% in 2022. But even with a solid rebound, we’re going to be left sitting on a deficit (annual overspend) of 10.3% of GDP, a drop from 17% for 2020-2021, the current tax year, but still a lot higher than anyone would have deemed sustainable in the pre-Covid-19 era. And the national debt will eclipse 100% of GDP until at least the mid-2020s.

So what is Rishi Sunak planning to do about it? There are two main measures. Fiscal drag is the big one that will hit individuals in their pockets. The other big move is on corporation tax. The Conservative Party’s plan used to be to make sure that corporation tax was always a good bit lower than in most other big economies. Sunak has entirely rejected that idea. Using the excuse that businesses have been helped out, and so they can be expected to pay the money back (ignoring who mandated that they be shut down in the first place), Sunak has raised the corporation tax rate from the current 19% to 25% from April 2023.

That’s more aggressive than had been expected, though it does come with a fair few exclusions. Small businesses (those with profits of below £50,000) will still pay a 19% rate, and only businesses with profits above £250,000 will pay the full 25%. Still, you could be forgiven for asking why, at a time when being more competitive is a priority for a post-Brexit Britain, the chancellor has hiked corporation tax quite so much.

Part of the answer came in the form of a significant carrot for businesses – the “super deduction”. Companies spending money on new plant and machinery in the next two years will be able to claim a 130% deduction in their tax bills. In effect, companies are being subsidised by taxpayers to splash out on new equipment. This equates to a significant cash windfall for businesses and will help to bolster cash flow at a critical time. Whether 130% is too generous or not and whether – as a result – much of that investment will be productive or wasteful, is another question, but the chancellor may not care. Any short-term sugar rush of spending that results in higher GDP growth and even a bit of inflation is likely to be welcomed by the government regardless of the long-term impact.

Sunak has provided more ‘near-term’ support for the economy than was expected, but overall he’s hoping to get the public finances back into some sort of order more quickly than anticipated with higher taxes from 2023- 2024. The good news is that if the economy recovers faster than the gloomy forecasts expect, then maybe this is it for tax hikes.

As for the fact that we’ll be sitting on national debt of 100% of GDP for some time, this probably only matters if we’re an outlier. As long as the rest of the world is splashing out (the US certainly is) or struggling with growth, then the UK is unlikely to attract specific attention.

Anyone invested in UK house prices rising for some time to come will have enjoyed the budget. The combination of spare cash (the majority of Brits have been saving more than normal), pent-up demand and last year’s stamp-duty suspension have been driving a sharp rise in both transactions and prices. The latter are now at record levels (again) with the average number of days it takes to sell a property down from 67 in November 2019 to a mere 49 in November 2020.

The chancellor is keen to keep this going. The stamp-duty suspension on property sales up to a price of £500,000 had been supposed to run only until the end of March. However, it will now move to the end of June – very nice indeed for the many people who have not yet completed on deals agreed months ago. Anyone buying at £600,000 in England will now find themselves paying a mere £5,000 in stamp duty, compared with what would have been £20,000 pre-Covid-19 and, according to the chancellor, 90% of buyers will pay no stamp duty at all under his scheme. But even on 30 June things won’t go back to normal: instead, the nil-rate band (which used to be £125,000) will be £250,000 until the end of September.

However the stamp-duty news turned out to be just the beginning of Sunak’s plans to support the property market. For those who can’t produce enough of a house deposit to secure a mortgage he has come up with yet another taxpayer-sponsored support scheme. In a “new policy to stand behind home buyers”, for any would-be buyer (first-time or not) who can produce a 5% deposit the government will guarantee the remaining 95% of the loan with a participating lender. This will help more people buy in the short term. But in pushing prices up again (which it will) it also leaves them both with huge mortgages to service at a time when rates are more likely to rise than fall and with a nasty risk of finding themselves in negative equity should house prices ever revert to their mean relative to earnings. Still, the plan is unambiguously positive for housebuilders.

Anyone concerned about their tax bill going up in the near future can now take a deep breath. It won’t – or it won’t look like it is anyway.

15th March 2020