A raft of measures has been announced in a day of co-ordinated action from the Government and Bank of England to counter a cocktail of economic, public health and market crises.
Today was largely but not solely about coronavirus. There was plenty for investors to focus on too. This was an unusual Budget day, full of drama and real substance.
Rishi Sunak gave a polished performance, just four weeks into the top job at the Treasury, balancing the need to reassure the country over the unfolding health scare while also presenting the new government as an administration that, in his words, ‘gets it done’.
The Chancellor’s first Budget was candid about the short-term impact of the coronavirus outbreak. He forecast 20% of the workforce being unable to work at any one time and disruption to supply chains. He expects a significant, if temporary, fall in demand. The next few months are going to be tough, he said.
To counter this, he set out a series of measures, focusing on providing ‘whatever the NHS needs’, a safety net for workers and support for businesses, especially smaller ones that are seen as most at risk.
In total, he promised a £30bn fiscal stimulus, building on the monetary support that the Bank of England provided first thing this morning when it announced: an interest rate cut back to 0.25%; a term funding scheme to encourage banks to lend to small employers; and an easing of the cash buffer that banks are required to hold on their balance sheets.
Whether or not these measures will be enough to prevent the UK falling into a technical recession this year is impossible to tell at this stage. Certainly, there was little guidance on this from the forecasts provided to the Chancellor by the Office for Budget Responsibility (OBR). Its numbers were struck before factoring in either the negative impact of coronavirus or the positive impact of the Government’s and Bank’s counter-measures.
They still show a 1.1% growth rate this year, although Fidelity’s chief economist Anna Stupnytska thinks zero is more realistic. Looking into the future, it is also unclear whether the package of measures announced by the Chancellor represents a temporary hike in spending or the beginning of a new fiscal framework. He would only say that he will report back on a review of this by the autumn.
Finding the cash to pay for higher spending is going to be one of the Chancellor’s biggest challenges in this parliament and investors’ attention was firmly focused on whether speculation about pension tax breaks would finally come to something. This is a perennial topic for pre-Budget check-lists and this time he delivered.
Specifically, he addressed the pension tax taper, the reduction in pension contribution allowance for higher earners. This is a hot topic because of the negative impact it has had on key NHS employees’ willingness to put in more hours at a time of desperate need in the health service.
Raising the income range in which the contribution taper takes effect from £150,000-£210,000 to £240,000-£300,000 means fewer high earners will be captured by the reduction in the amount they can save each year in their pensions.
But it’s not all good news. For the highest earners, who had already seen their allowable contributions fall from £40,000 to £10,000, the amount they can pay in will now be just £4,000 a year from April.
For those saving on behalf of their children or grandchildren, there was some unqualified good news, however. The amount that can be paid into a Junior ISA (JISA) has more than doubled from £4,368 to £9,000. The JISA is becoming a meaningful way of passing money down through the generations in a tax efficient way.
One other tax measure that had been well-flagged, but emerged slightly different from expectations, was a rethink of the widely-criticised entrepreneurs’ tax relief. This previously allowed capital gains tax relief on the sale of businesses worth up to £10m but this has been slashed to just £1m, saving the government £6bn over five years.
The government’s argument that 80% of the beneficiaries of this relief will see no difference is hard to argue with, as is the fact that a quarter of this £2bn a year benefit is enjoyed by just 5,000 people.
This was an accomplished Budget by a rookie Chancellor. It managed to combine seriousness over the coronavirus response with frankly populist measures like the freezing of all alcohol and fuel duties.
The measures set out to protect the environment, whether through a plastic packaging tax, flood defences or the removal of the polluting red diesel subsidy, are well made.
Perhaps the most encouraging feature of today’s torrent of announcements is the apparently co-ordinated way in which the Government and the Bank of England have moved swiftly to protect people and the economy at a difficult time.
You can hear more from me on the Budget in the latest MoneyTalk Podcast below
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Junior ISAs are long term tax-efficient savings accounts for children. Withdrawals will not be possible until the child reaches age 18. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.
Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest. Tax treatment depends on individual circumstances and all tax rules may change in the future. You cannot normally access money in a pension until age 55.
On 2 June 2020 - US gains; Europe rallies on stimulus hopes; Asia up
Germany leads Europe higher on subsidies for automakers, Lufthansa