- Marcus Brookes
- 11 March 2020
- 5 minutes
Budget – Initial Response
An eventful day began with Bank of England Governor, Mark Carney, delivering his swan song in the form of an unexpected cut in a key underlying interest rate from 0.75% to 0.25%. A few hours later, Chancellor of the Exchequer, Rishi Sunak, began his tenure in earnest by delivering a budget that looked similarly generous.
“I will do whatever it takes to support the economy” was his opening salvo. There followed an hour-long speech in which Mr. Sunak outlined higher spending on the NHS, flood damage repair, infrastructure, income support, statutory sick pay and grants for small business.
At the same time, he pledged to cut or postpone business rates, increase the national insurance threshold and reduce the burden on employers contributing to national insurance on behalf of employees.
The early part of Mr. Suank’s speech was notable for addressing the coronavirus crisis with measures that are designed to help support the National Health Service, small businesses and the industrial sectors most affected by the virus and the steps being taken to restrict contagion.
Reassuringly, Mr. Sunak made reference to his co-ordinated approach with the Bank of England, as well as with international counterparts. I look forward to seeing positive results from an internationally co-ordinated response which, I believe, is essential.
I am, however, left with a question that I hope to be able to answer in coming days.
How is he going to pay for it all?
There were some mentions of revenue gathering: equipping the HMRC to gather elusive tax payments, increased taxes on pollution, and the reduction of the controversial Entrepreneur’s Relief. Initial estimates suggest that these measures will not fund the spending spree.
At this early stage of reflection it would seem inevitable that the chancellor may avail himself of the ultra-low interest rates and increase borrowing through the sale of government bonds.
As an investor, I’m interested in just how big the bond sales will be as this will have implications for the prices of other bonds, the cost of borrowing for companies and individuals, and the rate of inflation. All of these factors influence business investment as well as imports and exports.
Mr. Sunak quoted the independent Office for Budget Responsibility (OBR) several times during his speech. He noted that the OBR had estimated that public debt (including all the new bonds) would fall from 79.5% of gross domestic product (the total annual output of the UK economy) to 75.2% by the end of the current government’s tenure in office.
If this can be achieved, all well and good. However, Mr. Sunak himself noted that the OBR’s calculations pre-dated the worst knock-on effects of the coronavirus crisis.
For now then, we have a few questions that need to be answered before we can conclude our assessment of the new government’s first budget.
I hope to have more substance to share with you in a few days’ time.
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