• 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.

Forecasts of future performance are not a reliable guide to actual results in the future; neither is past performance a reliable indicator of future results. The value of investments, and the income from them, may fall as well as rise and cannot be guaranteed and the investor might not get back their initial investment.

Important information

Any views expressed are our in-house views as at the time of publishing.

This content may not be used, copied, quoted, circulated or otherwise disclosed (in whole or in part) without our prior written consent.

Fees and charges apply at Schroders Personal Wealth.

In preparing this article we may have used third party sources which we believe to be true and accurate as at the date of writing. However, we can give no assurances or warranty regarding the accuracy, currency or applicability of any of the content in relation to specific situations and particular circumstances.

Let's start with a free initial consultation

We'll begin with a free, no obligation conversation to understand if our service is right for you. There are no hidden fees or charges, and you’ll only pay if you choose to go ahead with the recommendations in your personalised financial plan.

Tap into some of the finest minds in the business

Our regular newsletters are packed with food for thought. Sign up for expert views and opinions, and choose which areas of financial planning and investment you’d like to hear about.

This site is protected by reCAPTCHA and the Google privacy policy and terms of service apply.