Rishi Sunak’s appointment as Chancellor, following the surprise resignation of his predecessor Sajid Javid in mid-February, could indicate a change of tack for fiscal policy under the Conservatives.
After a decade of austerity, the party won a majority in the election of December 2019 on a commitment to “unleash Britain’s potential” by investing more in public services and infrastructure (as well as “getting Brexit done”, of course). Less has been said yet on how this spending will be funded.
Against this backdrop, there has been great speculation about what will be announced in the Budget on 11 March. Some of these themes are explored below. While some could be red herrings floated in the press to gauge public reaction, others could be set to make it in to this year’s red book.
What do we know already?
If any policy is safe above all, it is the so-called “triple lock” on the state pension. Introduced in 2010, the annual increase that pensioners receive each year is the highest of wage growth, consumer price inflation, or 2.5%. From 6 April 2020, the state pension will rise by 3.9%, in line with average earnings – the highest increase since 2012.
Besides sticking to this decade-long commitment to pensioners, the government has also raised the minimum hourly wage for workers. From 1 April 2020, three million of the lowest-paid workers will benefit from a new National Living Wage increase of around 6%. Over-25s will be paid a minimum of £8.72 per hour.
Since December’s election, Boris Johnson’s government has emphasised its commitment to “levelling up” the UK. Arguably the biggest single concrete manifestation of this goal is the green light given this February to High Speed 2 (HS2). The £100 billion-plus rail project, connecting the Midlands and North to London, is widely heralded as a key pillar in rebalancing the economy over the long term.
What looks likely?
HS2 isn’t the only expensive investment promised by the government. This one project aside, the Conservative election manifesto pledged to invest £100 billion in transforming the UK’s infrastructure, including a high-speed east-west rail line across the North and supporting the rollout of fast broadband to every home.
The government hopes this extra investment could pep up the UK economy, which grew by only 1.4% in 2019. While companies in certain sectors – and their investors – would stand to benefit directly from higher government spending, more would be expected to benefit indirectly by any uptick in economic activity.
Unless the government raises taxes – and we come on to this next – higher spending will have to be met through greater government borrowing. Indeed, the target of keeping the budget deficit below 2% of national income was dropped before the election, to allow for more investment in infrastructure.
One impact of this rise in borrowing would likely be felt by bond investors. The issuance of more UK government bonds, known as gilts, would be expected to push down their price in the market. After all, the less scarce an asset is, the lower its price normally is. Still, it should be noted that gilt prices are shaped by a range of other factors in global markets.
What looks possible?
With a reluctance to borrow more than 3% of national income each year to pay for investment, it looks likely that the government will look to raise taxes somehow to help cover the cost of its promised investments.
However, having committed to not raising income tax, value added tax or national insurance contributions, there are limited options available. Indeed, the Conservatives have pledged to actually raise the threshold for paying national insurance to £9,500, giving almost all workers an effective tax cut of £104 a year.
On the other hand, higher-rate taxpayers with an income of more than £50,000 a year, could soon face a reduction in the tax relief they receive on pension contributions. By giving everyone tax relief at a flat rate of 20%, rather than at their marginal tax rate of 40% or 45% if they are higher earners, it has been mooted that the government could claw back around £10 billion a year.
A less controversial, albeit less lucrative, move could be to target capital gains tax allowances. There has been speculation that entrepreneurs’ relief, which allows business owners to pay a reduced 10% rate of capital gains tax (rather than 20%), could be up for review.
Ultimately, of course, the only certainty is that the Budget will please some and displease others. While there is much beyond our control, we can all make the most of the allowances available to us under the current rules. When it comes to investing for our futures, this can include Individual Savings Accounts as well as pensions.
Remember, M&G are unable to give financial advice. The views expressed here should not be taken as a recommendation, advice or forecast.