Our take on Budget Day 2020
Given the serious nature of the challenges facing the UK and global economy at present, it was probably appropriate that Chancellor Rishi Sunak kept jokes to a minimum during his maiden Budget address. One such quip he did offer, though, was that he was ‘in favour of jobs miracles’, given the month he had just endured. Indeed, one can imagine the frenetic and constant changes being made to the draft of his speech as the Covid-19 crisis evolved at breakneck speed.
As such, his was very much a two-part Budget on Wednesday - first came the measures to weather the coronavirus storm. Thereafter, the Chancellor sought to put his stamp on spending plans for the remainder of the parliament. But there was a third component which kicked off the day’s events: a 50 basis point cut to Bank of England rates.
Here’s our analysis of Sunak’s debut at the despatch box, and the co-ordinated response to the coronavirus chaos with Threadneedle Street.
Was the Bank of England right to act?
Regular readers of this blog will know that we tend to adopt a relatively-hawkish tone, and have long favoured the gradual normalisation of interest rates provided the economy is ready. Nevertheless, we recognise the severity of the threat posed by the coronavirus outbreak, and therefore we understand this week’s intervention to lower base rates to 0.25 per cent. The only lamentable aspect is that the failure to hike rates (in a slow, steady manner) over the past decade leaves so little room for manoeuvre at times like this.
That said, the nature of the shock is such that rate cuts, in isolation, will have limited impact. So one of the supporting acts is the new TFSME, which should ensure the full benefit of the rate cut is passed on to small and medium-sized businesses. Coupled with the counter-cyclical buffer (whereby capital requirements will be slashed by two per cent), and a £100bn fund earmarked for lending at or near the new Bank rate of 0.25 per cent, banks will be well placed to increase lending volumes.
It is also sensible that outgoing Governor Mark Carney has kept something in reserve; deciding against extending Quantitative Easing at this time. He pointed out in a subsequent press conference that the extra capacity for banks to lend – up to £190bn – should be sufficient to navigate a crisis which he said need not ‘turn into 2008 if we handle it well’.
Will the Budget limit the damage of Covid-19?
As the Chancellor made clear, the Treasury and the Bank of England collaborated closely ahead of Wednesday’s events, and the package of measures to combat the economic threat of coronavirus was a reminder of the firepower of both fiscal and monetary policy when they are in lockstep.
Sunak arguably had more clout to wield, and, for his part, he did so emphatically, unveiling a war chest of £12bn geared specifically towards combatting Covid-19 disruption. This vast sum was underpinned by an emergency response fund for the NHS and other public services, an extension of statutory sick pay, a promise to pick up the tab for employee sick pay for SMEs, the suspension of business rates for firms in various sectors (with a rateable value of less than £51,000), and the provision of ‘business interruption’ loans of up to £1.2m for small companies.
Undoubtedly, it amounts to a decisive response, and there were few complaints from the opposition on the handling of this single issue. Some bemoaned the failure to increase statutory sick pay itself, while others argued that this spending splurge highlighted failures of years gone by. Concerns were also raised about the impact on borrowing and the national debt – concerns we share.
But in the context of the battle against Covid-19, the latter is a debate for another day, and Sunak’s actions will go a long way to shoring up the short-term futures of high street stores, gig economy workers and SMEs – entities who are so vital to the UK economy, and who are likely to be at the sharp end of a coronavirus-induced slowdown.
What about the rest of the Budget?
Although the coronavirus was the main backdrop to Budget 2020, there were plenty of other pledges and promises forthcoming on Wednesday. In fact, the total increase in fiscal stimulus amounted to a staggering £30bn. Naturally, such largesse included a few crowd-pleasers. From our point of view, we welcomed the boosts in funding to broadband connectivity, research and development, science and technology, climate change and infrastructure.
It was also hugely encouraging to see the Chancellor unveil an upcoming review into the fintech sector - the aim of which will be supporting growth and innovation to secure the UK’s position as a world leader in the industry, and also the wider digital economy.
But Mr Sunak’s scorecard was by no means flawless. For starters, while we welcome the temporary measures on business rates in the face of Covid-19, it simply shines a light on how toxic this levy has become, and it’s disappointing that long-awaited reforms have been pushed back to the autumn.
Elsewhere, only time will tell whether the decision to abolish the planned 2 per cent cut to corporation tax is a wise move, and we are sceptical about slashing the lifetime allowance for entrepreneur’s relief to just £1m. But it was the silence on IR35 which was most deafening, with these half-baked reforms set to cause widespread problems in the private sector from April.
And then there is the plight of savers. True, doubling the Junior ISA allowance to £9,000 from 2020-21 was a positive step. But there was nothing else for beleaguered savers to hang their hat on. No increase to the ISA allowance. No new NS&I products. Instead, the Office for Budget Responsibility forecasts that the state-owned bank will raise £6bn less by the end of the next tax year, suggesting returns on Premium Bonds could fall in a bid to deter incoming cash. All this, coupled with the cut to base rates, represents an underwhelming day at the office for Britain’s savers.
Notwithstanding the above, no Budget speech will ever pass without criticism, so Wednesday’s showpiece – the first in 18 months – will probably go down in the win column for the Chancellor. He deserves plaudits for facing up to the threat of Covid-19 head on, and has clearly demonstrated his support for small businesses and SMEs.
Additionally, the increase to public service spending is set to reach £100bn by 2024, which is an audacious figure by any measure. Questions will be asked about where the money is coming from, and how it could be better spent. But Mr Sunak has laid down a marker – one which should mitigate the economic fallout from Covid-19, and hopefully lay the foundations for growth in the future.
Our website offers information about saving, investing, tax and other financial matters, but not personal advice. If you're not sure whether peer-to-peer lending is right for you, please seek independent financial advice, and if you decide to invest with Lending Works, please read our Key Lender Information PDF first.
Wednesday’s Budget speech, coupled with the cut to Bank of England rates, represented a decisive response to the coronavirus. Here we analyse the impact it will have on mitigating disruption from Covid-19, along with the long-term implications of this significant fiscal stimulus.
Rumblings from the Treasury ahead of next week's Budget suggest tax grabs will be needed to fund increased spending, and it appears UK enterprise could be in the firing line. Here we articulate why targeting entrepreneurs and small business is ill advised.
In a difficult climate, customer acquisition and lead generation present stern challenges for UK retailers, and a great deal of marketing spend invariably gets directed towards getting feet through the door.
Over the last decade, there can be little dispute that the reputation of mainstream banks – and particularly the so-called ‘Big Four’ (HSBC, Barclays, Lloyds and RBS) – is at its lowest ebb.
The 2019-20 ISA season has been a damp squib, with banks disinterested in attracting savers’ cash, rates cut, and the stock market in freefall. However, the emergence of the IFISA means alternatives beckon for those seeking a stable middle ground in terms of risk and reward.
In a decade of slow recovery, the rapid rise in asset prices has been the standout. But how sustainable has price growth been, and could we be in the midst of a bubble?
Most people consider income tax to be a given, but in the UK it is barely two centuries old. In this article, we look at how this tax has developed over the years, and also why it is set to remain at the core of our tax system for many decades to come.