Last week, UK Chancellor Rishi Sunak delivered a budget that he said is designed to “protect jobs and the livelihoods of British people”, while acknowledging the government had been borrowing on “an extraordinary scale”. But he added that the country could be “optimistic about the recovery” and this Budget certainly seems to herald a re-opening of business after this very tough time. Boris Johnson explained that the government’s plan would focus on innovation, skills and infrastructure. Sunak’s Budget has two key aims: To set out the next phase of support for the sectors that remain suppressed, and to start preparing the ground for how the Government will stabilise the public finances.
Government support together with unprecedented easing from the Bank of England has provided a crucial lifeline to businesses and households over the past year – part of a global policy revolution which has cushioned the impact of the Covid-19 pandemic. This was vital to limit permanent economic scarring – which remains the Government’s top priority – with many parts of the economy still limited by restrictions.
Furlough programme extended to September
The extended furlough programme, continuation of the Universal Credit uplift and other extensions of Covid relief packages are essential to minimising long-term damage. Rapid vaccine roll-out has enabled the government to plan a route out of lockdown which is expected to enable economic activity to return to pre-Covid levels by the end of this year.
Plans to freeze personal tax thresholds and increase corporation tax rates – though not before the economy has recovered from the Covid shock – are early markers of a broader plan to stabilise the public finances.
That said, this doesn’t herald a return of the austerity seen after the global financial crisis in our view. Low interest rates are providing fiscal breathing room by keeping debt servicing costs low – for now at least.
But the UK has less room for manoeuvre than other Western economies; a higher starting deficit as a share of GDP, coupled with lower long-runs of sustainable deficit and growth rate.
While rates are set to remain low by historical standards, we cannot ignore the tail-risks which signal that the current regime of low interest rates combined with low inflation rates may not last forever.
UK economy set for 1% boost from vaccine rollout
The UK’s economic output could grow by an additional 1% as a result of government spending on vaccine distribution, an economist has said, amid a quarter in which lockdown is expected to put GDP into freefall.
In the final quarter of 2020, GDP surprised economists to rise 1% quarter-on-quarter as a result of stronger services activity, Brexit stockpiling and extra spending on NHS Test and Trace. But with a strict lockdown expected to continue for most of the first quarter of 2021, a forthcoming lowering of GDP is expected.
Deutsche Bank economist Sanjay Raja said data on government spending on vaccine procurement and distribution over the first quarter, at around £3bn to £5.4bn, could boost quarterly GDP by around 0.6% to 1%.
Raja added that the vaccine programme would also bring other benefits to GDP, such as a rise in manufacturing pharmaceutical activity as a result of domestic production of vaccines by AstraZeneca and others.
Good news for property investors
The chancellor announced positive news for homebuyers in his budget, with the extension and introduction of schemes to support property purchases.In his parliamentary statement, Rishi Sunak said that there will be an extension to the stamp duty holiday plus a return to 95% mortgages backed by the government to increase buyer confidence and further strengthen the housing market in England.
After much market speculation, Mr Sunak announced that the stamp duty holiday will be extended for a total of six months to support those currently in the purchasing process and encourage further activity over the coming months.Introduced in July 2020 to help support and accelerate the housing market during the pandemic, the stamp duty holiday was set to run until March 31, 2021. Since its introduction, the property market has grown at record levels, with 10-year high level price growth seen across the end of 2020.However, it was predicted that if the holiday is ended at the end of this month, more than 100,000 buyers who agreed a purchase last year will lose out on the tax savings.
The chancellor has announced that the stamp duty holiday will continue in its current guise as a tax relief on all property purchases up to the value of £500,000 until June 30. After that, from July 1 until September 30, the stamp duty holiday threshold will be reduced to £250,000 for a further three months.
From October 1, the stamp duty holiday will end, and the threshold for paying the tax will return to any properties over £125,000.
A return of the 95% mortgage with government backing
Aspiring homeowners will also be pleased to hear of the return of 95% mortgages, allowing purchasers to put down a smaller deposit on a new home. These mortgages will be guaranteed by the government, enabling lenders to provide these high mortgage deals, and act as part of the wider pledge from Prime Minster Boris Johnson to turn “generation rent” into “generation buy”.
Under the chancellor’s new plans, buyers will be able to place down as little as a 5% deposit on properties under the value of £600,000 – according to data from Rightmove, 86% of all homes currently on the property market fall into this price bracket.
The mortgage guarantee scheme will be open to first-time buyers to make getting on the housing ladder more accessible by helping to reduce the significant cost of a deposit.
Investment to lead UK into economic recovery
Sunak announced a total Covid support package for this year and next of £352bn, which included £5bn in restart grants for the hospitality sector to provide much-needed financial relief for businesses that have remained closed for many months.
This in turn will kickstart the UK’s leisure and tourism industry and attract increased revenues from both domestic and international visitors.
The chancellor also announced a new national infrastructure bank which is to open in Leeds with £12bn capitalisation from the government. Green projects will be supported through a green recovery bond as part of the government’s agenda to eliminate carbon emissions.
The chancellor says the Treasury will reform the Bank of England’s mandate to include targeting net zero emissions, in addition to the existing 2% inflation target.
In essence, the chancellor has balanced support with capitalisation to provide a more attractive landscape for investment. This is set to ensure strong growth and a quick recovery from the unprecedented damage to the economy from the pandemic.
Ignite Invest specialises in seeking out opportunities that lie beneath the radar of most investors. Many of our opportunities have become even more attractive as a result of the recent Budget. We don’t follow the herd because we understand that the best value can be found where others are not looking.
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