When Rishi Sunak delivers this year’s Budget on March 3, attention will be on what measures the Chancellor enacts in response to an economy stifled by lockdown and still in the grips of the pandemic.
The Budget is Sunak and the government’s chance to outline a path for the UK’s economic recovery out of the pandemic. Yet despite falling infection rates and talk of easing restrictions over the coming months, there are still thousands of individuals and businesses in need of continued support. Even if the tone alludes to an end of the pandemic, the policies are likely to be centred around extended support schemes, and how they will be paid for.
Sunak has always warned that the UK economy “will get worse before it gets better”, but with the current deficit on track to hit £400bn by March, striking a balance between support and spending will be crucial. The Office for Budget Responsibility has suggested that between £27bn to £100bn in tax rises will be necessary to balance the books.
Following last year’s budget, the FTSE 100 closed down by 1.4%, however it is near enough impossible to predict just what exactly will be announced – and the implications this will have on investment markets.
Perhaps the only certainty is uncertainty — but investors can be prepared for what might be in store.
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An extension on the furlough scheme is probable, with retail, hospitality and tourism being the areas likely to benefit most, although the gradual reopening of the economy may boost these sectors to recover more quickly too.
The hospitality sector, the UK’s third largest employer, are calling on the chancellor to make ‘essential’ commitments to the industry. Plenty of UK-listed companies felt the full pain of the lockdown — especially at Christmas — and the Chancellor may throw them (yet another) lifeline.
The aviation industry, which has been calling for additional support, may see the glimmers of recovery after the government announced that international travel may be able to resume from as early as May.
EasyJet has already been making headlines, after its share price grew significantly over the past week.
The stamp duty relief extension, already widely reported as being part of the Chancellor’s announcement, will reportedly benefit 300,000 property sales. This should provide a welcome boost to the housing market, as well as the industries it supports, such as estate agents, developers and even building material suppliers.
While some DIY outlets have boomed over lockdown, the actual construction sector has been hit by uncertainty and supply chain issues, which has been exacerbated by the UK’s departure from the European single market. Support from the Chancellor through a stamp duty relief extension may be welcome news.
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The Old Lady of Threadneedle Street
One widely rumoured fiscal measure is the introduction of negative interest rates by the Bank of England. The interest rate determines how much interest the UK’s central bank pays to other institutions that hold money with it, and how much it charges them to borrow.
A negative rate would encourage banks to lend money rather than hoard it, which could see more mortgages and loans being granted as a result, providing a boost to the wider economy.
The Bank of England’s Monetary Policy Report outlined the negative rate plans as a failsafe in case of another unexpected downturn.
Although it does not fall under the remit of the Chancellor’s Budget announcement, the measures that Sunak brings in will likely have this in mind.
Some of the measures may provide a boost of confidence to the retail and domestic tourism sectors as we near a phased reopening of the economy, such as the cut in VAT for tourism and hospitality being renewed for 2021/22 tax year.
Recently, the government offered grants of up to £9,000 to businesses in retail, hospitality, and leisure to keep them afloat, so any additional announcements will be on top of what has already been brought in.
What to do on March 3
For investors, the key message is to pay attention to the Chancellor’s announcement, but also anticipate that it is not going to turn the market on its head overnight. The plans outlined by the Chancellor are intended to bolster the UK economy in the long term, rather than shock the market back into life.
But as always, you should expect a surprise or two, sometimes referred to as the “rabbit in the hat”. In the summer Budget, Sunak revealed the Eat Out to Help Out scheme at the end of his speech. Whether another similar plan is in the works is yet to be seen but pay close attention to the announcement and you’ll be in the best position to look after your investments.
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