11 March 2020
A significant increase in capital expenditure had long been trailed ahead of the first Budget of the new UK government, but as the challenges presented by the coronavirus epidemic rose to the fore, some commentators speculated that the capital investment might be postponed, in favour of more measures to tackle the virus at this juncture. In the end, Rishi Sunak has gone for both.
This is undoubtedly a positive development, and it is especially pleasing, from an investor’s perspective, to see the Government/Treasury acting in such a co-ordinated way with the Bank of England; with regard to the latter, this morning’s announcement of a cut to Bank Rate was just the response the market was looking for, but it would have been less relevant had it not been accompanied by the new Term Funding Scheme and counter-cyclical buffer measures. These moves will help commercial banks to support businesses, which is crucial at a time of uncertainty.
So, the Bank did what it needed to do this morning; what was needed this afternoon was an ambitious fiscal response, and this is exactly what the Chancellor has provided.
Coronavirus measures – timely and decisive
The package of measures to tackle the immediate economic threat of the outbreak of the coronavirus strike me as being eminently sensible. It is clear that the Government is taking the threat extremely seriously, as suggested by estimations that up to 20% of the workforce could be out of action at any one time.
The measures around statutory sick pay should do much to restore confidence, and while the “whatever it takes” approach to funding the NHS through the crisis is a welcome and decisive move.
Similarly, I am encouraged by the decision by the Government to underwrite losses to banks up to 80% on business interruption lending to SMEs, which should go a long way to ensuring the continued viability of smaller firms suddenly facing new, challenging and un-forecast headwinds. The suspension of business rates for small businesses in the hospitality industry is also a welcome boost at a challenging time.
My immediate overall reaction is that the Chancellor’s own description of these measures (“temporary, timely and targeted”) is, in my view, spot-on.
The economy – thumbs up from the OBR
That the Chancellor was able to secure a statement from the OBR that the Budget should make a meaningful contribution to boosting the UK’s productivity – so woefully low for so long – will quite possibly be seen as a major coup for him, and rightly so.
Meanwhile, the economic growth forecasts, while positive, are something of a disappointment; in my view, there is a high chance that these will prove to have been excessively pessimistic as we look ahead to 2021 and 2022.
It is interesting to note that the Chancellor has managed to deliver such a huge increase in spending commitments while remaining within the Government’s self-imposed fiscal limits (“with headroom to spare”), and with such apparently modest clawbacks of taxation from elsewhere. This has been achieved partly as a result of the exclusion of the £12bn of funding to combat coronavirus from the official fiscal figures, and partly because the OBR has excluded the expected negative economic impact of the virus from its forecasts.
What is clear from reading some of the detail is that Government borrowing is set to rise over the course of this Parliament. As the saying goes though, with bond yields this low, it would be rude not to.
In summary though, there is no doubting that this is a very significant fiscal expansion, as long rumoured, and across a broad swathe of sectors.
The markets – initially muted
The initial reaction of both equity and currency markets was relatively muted, although the reality of 24-hour newsflow regarding the coronavirus may mean that other factors were at play. It will take some time for the sectoral impacts of the Budget to become clear, but my immediate thoughts are as follows:
- Energy sector: The announcement of additional funding for carbon capture and storage will be welcome news for certain businesses in the power generation sector.
- Housebuilders: This morning’s loosening by the BoE will have done more to support housebuilders than any of the fiscal measures in the Budget. Nevertheless, this feels like a favourable environment for the sector.
- Retailers: While the reductions in business rates will be an extremely welcome boost for small retailers, they will do little to support the likes of Tesco or Next. Nevertheless, what is good for SMEs is likely to support consumer confidence at a time when it is in dwindling supply, and so the measures are certainly to be welcomed.
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