A clever budget by the Chancellor was bolder than we expected, both in terms of the near term fiscal support provided and the tax rises planned for future years.
It was smart because it was designed to encourage spending and investing, which he will hope will lead to economic growth in time for a big increase in corporation tax in 2023. One core aim is to try to push prices and therefore inflation higher, reducing the real term cost of the recently increased national debt. In addition, any accompanying rise in salaries will be more heavily taxed as income tax brackets are frozen for several years ahead. This clever freezing of the personal income tax brackets, inheritance tax thresholds, and the lifetime allowance for those with pension funds, will increase the slice the treasury takes from family estates and from private pension funds. Effective financial planning will be as important as ever in managing client assets to ensure they continue to work as hard as possible for them.
The Chancellor also supportively rolled forward virtually all of the measures that have been in place to support the economy through the pandemic so far, resulting in a net giveaway of £59B in 2021/22, equivalent to 2.8% of 2020 GDP. Businesses were given an extra £6B in rates relief and £5B in grants, while hospitality and tourism businesses benefited from an extension of the 5% rate of VAT until the end of September, followed by a 12.5% for the subsequent six months. Mr. Sunak also announced a “super deduction” policy, which will enable businesses to cut their corporation tax bills by an amount equivalent to 130% of capital expenditures in 2021/22 and 2022/23. This is good for the manufacturing sector in particular, but less useful for the service sector.
The Chancellor extended the furlough scheme and the £20 per week uplift to Universal Credit until the end of September and announced that self-employed people will be able to claim new quarterly grants in Q2 and Q3. These policies are expected to boost government spending by £24.7B in 2021/22. This will help keep the infrastructure of the economy in place far more effectively than first feared, as we now expect unemployment to peak at around 6.5 million, not the 11.5 million feared last summer.
From a home buying perspective, a new mortgage guarantee scheme will be up-and-running in April. He also announced that the threshold for stamp duty would be kept at £500K until the end of June, before declining to £250K by the end of September, when it finally will return to £125K. This again will boost the housing market and house prices for a little while longer before we are likely to see a slowing and a marginal reduction in house prices in the year following.
So, with COVID-19 on the back foot and the vaccine on the ascendency, the chancellor is sensing an opportunity to fuel the economy up into the latter part of 2021, getting consumers spending again. In addition, for any business looking to expand their investment heavily into Research and Development (maybe into innovative change or technological advancement), then the UK has become the most tax efficient place to run your operation in the globe. Bold indeed.
Portfolio wise, February was a tough month, or to be more specific, the last week was difficult as global assets sold off together. Why? Well that’s down to higher inflation expectations which spooked investment markets, though we think that the major moves in bond yields that were the precursor for the sell-off in equities will not be repeated to that extent anytime soon. Markets should settle, as increased inflation is a desired outcome for policymakers (the UK budget reinforces that), given high debt burdens. There are several counter forces at play, and we are not expecting sustained inflation over a number of years from here, given debt levels, demographics and technology innovation (see our blog here: https://www.dbwood.co.uk/blog/inflation-should-we-worry/). We have nonetheless made some tactical adjustments given the opportunities that presented themselves in the sell off last week, so although portfolio values dipped, it has once again provided us with the chance to add to areas where we see good value. Just like the Chancellor, we will remain active and forward looking, using market volatility to our advantage.