Chancellor of the exchequer Rishi Sunak is set to announce the latest UK Budget on 3 March. We take a look at the key issues that should be addressed, and what that means for investors.
The road to recovery
With government borrowing set to top £300bn this fiscal year, there have been calls in some parts for 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 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 grip of the pandemic, albeit hopefully coming out of the other side, as the vaccine rollout gathers pace.
Is a furlough scheme extension in the works?
The furlough scheme is one area that is proving to be extremely expensive, and is due to end in April, while the cut in VAT to 5% from 20% is also due to expire at the end of March.
Business rates are another area the chancellor is likely to need to have a 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 for the new tax year. Either that, or he could come up with a whole new tax regime for a sector that is likely to take a 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 tweaking, 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 the next Budget in November, when hopefully the economic outlook will be much clearer.
It would appear that the chancellor 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 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.
In the upcoming Budget, the chancellor is likely to extend furlough for certain vulnerable sectors, like airlines, and some forms of hospitality, while the stamp duty holiday could get extended until the autumn.
All of these challenges and more 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, 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 investment in renewable projects. The recent decision to cut National Savings rates was incredibly short-sighted at a time when the government ought to be encouraging people to put their excess capital, or savings, to work.
Fifty-year bonds, or infrastructure bonds, could be another area that the government looks 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 – there were €59bn worth of bids for French 50-year bonds.
Over the past few years, the likes of Austria, Belgium and Ireland have issued 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 and education are set to rise. This means that raising funds by way of longer maturities may increase in popularity, but governments will need to act quickly while interest rates remain low.
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