Unsurprisingly, the global coronavirus pandemic loomed large over the Budget, with Sunak stressing the challenges facing the UK economy. Businesses risk being affected by staff unable to work, supply chain issues and, critically, a reduction in consumer spending.
To help counter these headwinds, the Chancellor promised a surge in government spending to support businesses and help to stimulate the UK economy.
How will the Budget affect financial markets?
The Treasury acted in concert with the Bank of England. On the same day as the Budget, in a further bid to boost the UK economy amidst the coronavirus outbreak, the Bank took the significant step of reducing base interest rates from 0.75% to 0.25%, back to their lowest level in history. By lowering the cost of borrowing for businesses and individuals, the Bank hopes to stimulate investment and spending in the UK economy.
However, this step, alongside the Budget’s promise of a fiscal boost, was not enough to avoid the UK stockmarket’s largest fall in more than three decades, on 12 March 2020.
Under more normal circumstances, the announcement of extra government spending would be expected to boost company shares. Only time will tell whether the Chancellor’s commitment to “Get Britain building” will lead to renewed optimism for certain sectors. As well as helping companies directly involved in infrastructure, the government‘s pledge to invest over £600 billion in better roads, railways and housing over the next five years should buoy demand in the wider economy.
From a longer-term perspective, it is hoped this uptick in infrastructure spending should help encourage the productivity of the UK economy. Critically, the extra spending will not be funded by raising taxes, but through borrowing. Over time, this could have a significant impact for investors in UK government bonds.
All other things being equal, greater issuance of UK government bonds is likely to push down their price. After all, price reflects supply as well as demand. There are many other drivers of government bond prices and yields, however, not least inflation. Higher current and expected rates of inflation would typically result in higher bond yields but, with the recent collapse in oil prices, higher inflation looks unlikely for the time being.
How will the Budget affect your finances?
The Budget brought in several measures that will reduce tax bills. Changes to pension annual allowance rules mean that, from 6 April 2020, hundreds of thousands of higher earners will be able to save up to £40,000 into their pensions a year without penalty. In a move aimed at supporting the likes of doctors, the changes mean those earning £200,000 or less will not have to worry about being hit by restrictions that previously kicked in at £110,000.
On the other hand, Entrepreneurs’ Relief, which allows those selling a business to pay capital gains tax on their profits at a reduced rate, is being curtailed. The lifetime limit on claiming this tax relief is now £1 million, down from £10 million. The Chancellor did confirm, though, that everyone would benefit from a slightly higher annual capital gains tax allowance, which is rising from £12,000 to £12,300.
There was good news for generous parents and grandparents – or rather their children or grandchildren – as the amount that can be saved into tax-friendly savings vehicles is more than doubling. From 6 April 2020, the annual allowance for Junior Individual Savings Accounts (ISAs) and Child Trust Funds (CTFs) is increasing from £4,368 to £9,000. The adult ISA allowance stays the same at £20,000 per year.
What does it mean for the future?
This year’s Budget came at a turbulent time in which fewer investors seemed to be focusing on the long term. However, only time will reveal whether the UK Government’s extra spending – alongside the cut in interest rates – will give the UK economy a shot in the arm as it battles with the effects of coronavirus.
Please bear in mind that M&G is unable to give financial advice. The views expressed here should not be taken as a recommendation, advice or forecast.
The value of any fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested.