Morning Brief – Budget

Budget

For the past few days government sources have steered expectations surrounding the budget that was delivered to the House of Commons yesterday. As with most policy changes since the pandemic begun, very little was left to the announcement itself. The push towards higher corporation taxes, extension of the stamp-duty holiday and freezing of income tax thresholds were widely anticipated by the market. This allowed the new policies to be digested and priced into GBP ahead of yesterday’s address by Chancellor Rishi Sunak. What was left to the imagination and speculation, however, were largely pro-investment and pro-growth allocative decisions that could support the Pound from herein.

Corporation tax in the UK, the chancellor reminded us yesterday, will still be the lowest level in the G7. The taxation of more profitable companies up to the 25% level is expected to raise £17bn a year to plug the hole in the UK’s public finances. Less profitable companies will retain the 19% rate. The property market too is of systemic importance to both the UK economy and the GB Pound and the extension of the stamp duty cut, whilst meaning that the government will forgo an additional three months of its usual tax revenue below the £500,000 nil-rate band, should support this market. This policy should also shoo tabloids from speculating of a decline in house prices as they began to in January. Now with a tapered end to this policy measure in September, buyers should have relief until the economic recovery takes grip to support house buying activity. The disturbance we saw recently in Hong Kong’s markets as a result of disorderly and rising stamp duty rates stands as testimony to the property markets significance to national markets. This makes the extension of the stamp duty policy too supportive for GBP.

Those policies that were held back until the Chancellor’s delivery from the dispatch box yesterday included the spend now, tax later elements. The UK has, for years, from an economic perspective had an issue with productivity and productivity growth. The UK’s productivity problem has been the concern of many governments and, by consequence, the target of many parliament defining policies. To name but a few, think, the northern power house, HS2, Crossrail and the apprenticeship subsidies. What the chancellor announced yesterday was a considerable tax incentive for manufacturing and corporations working in the physical economy to invest now. Companies spending on qualifying plant machinery will be afforded a super-deduction of 130% on such investments and a first year allowance of 50% on top. These tax breaks were previously at 18% and 6% respectively encouraging businesses to drawdown future investment which will have the impact of both boosting GDP (of which investment is a lagging component) and raising the productivity level of the UK economy.

The set of policies could allow the UK economy to outperform in the post-pandemic recovery phase boosting yet further the bumper economic growth that is expected to be ushered in during the second half of this year. Whilst the prospect of higher tax burdens for companies and individuals alike will still have to be stomached towards the twilight of this parliament and the next, the path for the immediate economic rebound has been brightened by yesterday’s budget.

Discussion and Analysis by Charles Porter

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