Billed as the most important Budget in peacetime history, Chancellor Rishi Sunak laid out the government’s taxation and spending plans before the House of Commons earlier today. His message was uncompromising, promising to do “whatever it takes” to fix what he said was the ‘acute damage’ that had been done to the economy in the wake of the Covid-19 pandemic.
So, what are the main points, and what effect did it have on the Pound?
As had been expected, taxes were raised in order to fill the £2.1 trillion ‘black hole’ that has opened up at the heart of the country’s finances since the pandemic took hold. Government borrowing will hit £355 billion this year, which is the highest ever level in peacetime. In fact, in the wake of Mr Sunak’s Budget, the Office for Budget Responsibility (OBR) estimates that the tax burden will be the highest it has been in over 50 years and is on track to reach 35 percent of GDP by the years 2025 – 2026.
Nevertheless, the majority of the burden of tax rises has been delayed and deferred, with no immediate raises in either income or corporation tax. In fact, the personal tax threshold will remain unchanged, as will National Insurance contributions and VAT. However, corporation tax on company profits will rise from 19 percent to 25 percent, but not until 2023, in order to give firms breathing space and allow them to plan for the increase. Tax rates for smaller companies that make profits of less than £50,000 will remain unchanged.
There was some welcome news for furloughed workers as the chancellor extended the jobs retention scheme until October. However, payments will be tapered from July onwards, with employers expected to pay 10 percent of wages, rising to 20 percent from August.
At the same time, support for the self-employed will be extended to September, and shops and other retail businesses which are considered non-essential can apply for a grant to help them get back on their feet.
Currently, some 700,000 people have lost their jobs since the pandemic started, but initial forecasts that the rate of unemployment would rise to 11.9 percent by next year have now been sharply revised down to 6.5 percent.
National Insurance contributions were left unchanged, and there was more good news for low-income employees as the minimum wage will be increased to £8.91 from April.
The Treasury revealed the OBR was now forecasting a 4 percent growth in UK GDP for 2021, which is lower than the 5.5 percent calculated back in November. However, 2022 growth forecasts have been increased, up from 6.6 percent to 7.3, which is perhaps the reason why the chancellor has decided to delay some of the tax rises.
It is notable, however, that growth forecasts beyond 2022 have declined, indicating that the ‘Covid recovery’ will be over by then, and historic levels of annual growth can be expected. This could potentially negatively impact future tax revenues, although the OBR has not flagged up any warnings in any of its analyses.
These forecasts take place against a backdrop of a confirmed 9.9 percent contraction in the size of the UK economy in 2020. This is the sharpest drop since 1709, although Mr Sunak reassured that most of the lost growth would be made up for by the middle of 2022.
As the chancellor delivered his budget to the Commons, Forex traders were generally left unmoved by his pronouncements. Sterling retained its strength against the US Dollar, barely shifting from the $1.40 handle it has been pegged at for over a week, although it did slip back to $1.39 in later trade. Similarly, against the Euro the Pound remained at €1.16, where it had been all day.
That the Pound didn’t react much to the UK Budget is perhaps not surprising as there was not much of impact which had not already been priced in by markets. Nevertheless, when the longer term is considered there were some details that should prove to be Pound-positive in that they are aimed at facilitating trade and investment with both the EU and the wider world.
The first came in the form of the creation of eight special economic zones within the UK – or ‘Freeports’ – where different economic rules would apply in order to facilitate business and trade. Once this Freetown scheme has been studied it could lead to greater confidence in ‘Post-Brexit’ Britain being able to trade more easily with the EU and beyond.
In addition to this, the chancellor also talked about a vision to make the UK a ‘high tech superpower’, citing the success of the vaccine programme, as well as other digital industries. To this end he said a new visa scheme would enable UK based tech firms to more easily recruit foreign workers.
Alcohol: Duties to be frozen for second year in a row. ‘Buy your Boozer’ scheme launched aimed at helping local communities rescue local pubs from closure.
Fuel duty:_ Also frozen for eleventh consecutive year
Benefits: £500 one-off payment to working tax credits recipients
Minimum wage: This will be increased to £8.91 from April
Environment: New UK Green Infrastructure Bank to be established in Leeds to fund £40 billion in public and private projects
Green bonds: £15 billion in ‘green’ bonds to help private firms meet net zero by 2050
Stamp duty: Holiday on house purchases in England and Northern Ireland to be extended to June
Inheritance tax: No change
Business investment: £20 billion tax breaks allocated to help unlock potential
Shops: £5 billion pool in grants for shops and other businesses which were forced to close
Non-essential retail: £6,000 per premises for non-essential outlets due to re-open in April and £18,000 for gyms, personal care providers and other hospitality and leisure businesses
Contactless payment: Limit to rise to £100
Towns: £1 billion to help regenerate blighted towns
English Freeports to be created: in East Midlands airport, Felixstowe and Harwich, Humber, Liverpool city region, Plymouth, Solent, Thames and Teesside
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