The Chancellor found himself between a rock and a hard place when deciding on the contents of the Budget. Government spending has skyrocketed as a result of the pandemic, but even more ‘fiscal firepower’ is needed to tide the economy through the summer and to kickstart growth once the public health restrictions end once and for all.
The message from the Chancellor was clear: this additional spending comes at a cost, and repaying the borrowing will require the attention of future governments for many years to come, and we should expect a tough fiscal environment ahead. For now, it seems there is simply no alternative than to freeze various tax thresholds and ISA allowances.
The Budget covered three main stages: the immediate economic stabilisation and support during pandemic recovery; the path to fixing the public finances; and the long-term shape of the economy. Here are four key takeaways from the Budget:
1. There will be one last bout of fiscal firepower
The Chancellor promised to unleash the “full force of the government’s fiscal firepower” to tide the economy through until the public health restrictions end and we can return to some semblance of normality.
As such, the Chancellor delivered an extension to the government’s economic support package, most notably the furlough scheme and the self-employed income support scheme.
No government support scheme has been subject to quite so many twists and turns as the furlough scheme. The scheme was introduced in March, to be open for three months. In April it was extended until the end of June. In May, it was extended until the end of October. In October it was extended for a further month until the end of November. In November it was extended until the end of March. In December 2020 it was extended until the end of April 2021.
And now the Chancellor has extended it for a sixth and hopefully final time until the end of September 2021, with the government contribution tapered from July.
The Chancellor also announced more help for the self-employed in the form of a fourth and fifth income support grant, which will for the first time include those classed as newly self-employed who have been shut out of the scheme for almost a year.
For the housing market, there will be one final extension to the stamp duty holiday until 30 June 2021, before a reduced nil-rate band of £250,000 is introduced until 30 September 2021.
These measures, alongside an extension to business rates holidays, a new recovery loan scheme and a grant scheme for those businesses most affected by the pandemic should give businesses reassurance that they will make it through the other side of the crisis.
2. We’ll be going for growth in 2021 and beyond, but the public finances are stretched
The OBR published updated fiscal forecasts alongside the Budget, which showed that GDP is expected to increase by 4% in 2021 and 7.3% in 2022 before returning down to more normal levels of 1.7% in 2023. The economy will recover to its pre-COVID level by the middle of 2022 – six months earlier than the OBR previously reported in November 2020.
That said, the public finances remain in a perilous position. Borrowing reached 16.9% of GDP in 2020/21, the highest level in peacetime ever, and underlying debt will reach 97.1% of GDP in 2023/24. The Chancellor, renowned for his fiscal conservatism, will be itching to start bringing the public finances back on a sustainable footing before the next general election in 2024.
3. The black hole will be filled with a ‘fiscal ice age’
With the notable exception of corporation tax, which will increase to 25% by 2023, the Chancellor’s plans to bring the public finances back on sustainable footing will start with a freeze to various tax thresholds and allowances.
The Chancellor announced a freeze in the personal tax thresholds at 2021/22 levels until 2025/26, alongside a freeze in the inheritance tax thresholds, national insurance thresholds, the annual exempt amount for capital gains and most notably, the pensions lifetime allowance, which will be frozen at £1,073,100 until 2026.
The pensions lifetime allowance is the most controversial of all the freezes, given it will have the biggest impact on doctors on the front-line, who may decide to retire early or reduce their hours significantly to avoid the lifetime allowance charge. Not a good outcome for the NHS.
It may seem like a fairly trivial move to freeze these thresholds and allowances, but freezing the personal tax thresholds alone will save the government over £19bn by 2025/26, and hopefully the freeze will negate the need for any tax hikes later on down the line.
4. The government have an eye on the long-term
The Chancellor promised to turn “generation rent into generation buy” with the introduction of a new mortgage guarantee scheme in April 2021, which will provide a guarantee to lenders across the UK who offer mortgages to people with a deposit of just 5% on homes with a value of up to £600,000.
The new scheme will, on the face, be a big boost for first time buyers who had seen lenders closing their doors on borrowers looking to take out higher Loan To Value (LTV) mortgages. But there is a danger that generation rent simply becomes generation negative equity If property prices take a tumble and we see a proportion of first time buyers finding themselves with negative equity. The dream of owning a home will very quickly become a nightmare.
The Chancellor also announced that from this summer, the government will offer a green retail savings product through NS&I direct to retail consumers. These bonds will attempt to solve the dual purpose of allowing retail investors to buy into the green agenda, while providing an outlet for the ‘accidental’ savings build up by households during the pandemic.
Ultimately, any measure which allows people to connect their own finances to the green economy is a positive step forward, but as with any new product, the devil will be in the detail. The million-pound question is how much will be raised from retail investors through the green savings bond? Will it actually make a difference to efforts to achieve net zero?
And who could forget the levelling-up agenda. The Chancellor announced a new National Infrastructure Bank to be based in Leeds and to provide capital to projects that go towards the government’s net zero targets. Alongside this we had the announcement of eight new freeports, all around the country, as well as a new treasury economic campus to be located in Darlington.