Chancellor of the exchequer Rishi Sunak is set to announce the latest UK Budget. We take a look at the key issues that should be addressed, and what that means for investors.
The road to recovery
With the government set to borrow over £300bn this fiscal year, there have been calls in some parts for the chancellor, Rishi Sunak, to start looking at measures to try and plug the gap between spending and tax revenue.
While this is entirely understandable given the size of the deficit, as well as the increase in national debt, one has to question as to whether doing so might actually make any recovery that much more difficult.
As things stand the UK, along with most other countries is still in the midst of the pandemic, albeit hopefully coming out of the other side, as the vaccine rollout gathers pace.
An extension to furlough
The furlough scheme is one area that is proving to be extremely expensive, and which was due to end in April. However, last night it was announced that it had been extended through to the end of September. This is welcome but the chancellor probably needs to go further by carrying over the cut in VAT to 5% from 20%, which is also due to expire at the end of March.
Business rates are another area Rishi Sunak is likely to need to look at, having implemented a holiday for the tax year just gone for aviation, restaurants, bars and other leisure venues, he is likely to have to do the same thing again for the new tax year. Either that he or could come up with a whole new tax regime for a sector that is likely to take a very long time to recover, though something like this can’t just be dreamed up on the hoof.
These are the key areas that the chancellor needs to look at extending, or at least tweak given that a full economic reopening is still some way off. Early indications suggest that most of these key measures are likely to be extended until another Budget in November, when hopefully the economic outlook will be much clearer.
It would appear that Sunak has recognised it would be incredibly risky to end these support measures completely. A return of VAT to 20% and the reintroduction of business rates would not only tip a lot of struggling businesses over the edge, but it would also exert upward pressure on inflation, at a time when the UK economy will still have various lockdown measures still in place.
Will aviation and hospitality receive a boost?
Certain sectors are likely to need extended support if the government wants to ensure that the most exposed industries are still there when lockdown is finally eased.
Sectors like aviation are likely to remain in the doldrums for some time, particularly at a time when other countries' vaccination programmes aren’t yet complete. The hospitality sector is also likely to continue to feel the effects, and while pubs and restaurants are likely to be able to reopen, it is more than likely that it will be with certain limitations in place.
Large-scale events which attract significant numbers of people are also likely to have their numbers capped to ensure that some form of social distancing is observed, at least until next year.
All of these challenges and more for this year will mean that the chancellor would be ill-advised to start thinking in terms of cutting spending and raising taxes aggressively this year.
A time for long-term solutions
It is entirely right to be concerned at the level of the current deficit, however with borrowing costs still at fairly low levels, even after last week's rise in gilt yields, the government can afford to be creative when it comes to timeframes in narrowing the gap between taxation and spending.
New long-term funding or savings vehicles would be a start, with a view to encouraging long-term investment in renewables projects. The recent decision to cut National Savings rates was somewhat misguided at a time when the government ought to be encouraging people to put their excess capital, or savings, to work.
50-year bonds, or infrastructure bonds, could be another area that the government could look at, extending the debt profile of UK borrowing. It already has the longest repayment profile in terms of its peers at over 10 years, and there is demand for it if the recent auction by the French government is any guide, where there was €59bn of bids for French 50-year bonds.
Over the past few years, we’ve seen the likes of Austria, Belgium and Ireland issue a 100-year bond, and while so-called century bonds tend to be associated with emerging market economies like Argentina, the costs of the pandemic are likely to see these types of instrument increase in use, especially if governments are reluctant to plug the fiscal gap too quickly.
With the costs of Covid-19 likely to increase, the amount governments will need to spend on health as well as education are only likely to increase. This in turn will mean that looking to raise funds by way of longer maturities is also likely to see an increase in popularity, however governments will need to act quickly while interest rates remain low.
As for the upcoming Budget, the chancellor has already extended furlough, and is likely to have to do something similar with the various tax and business rates reductions, while the stamp duty holiday could well get extended until the autumn.
What is ultimately needed is significant tax reform on the current business rates system that penalises retailers with physical premises and stores, over their nimbler online counterparts. That is something that might have to wait a little longer for, even though the government has had plenty of time to come up with alternative solutions. Maybe what is needed is a white paper or widespread consultation on possible replacements, because one thing is certain, we can’t go on like this with the present system.
As for spending cuts and tax rises, we might get some signposting of a possible rise in corporation tax, but even here anything of that nature that is implemented much before 2023, would be foolhardy in the extreme, and send the wrong message to businesses.