Strategy team: Kevin Gardiner
The UK budget, as expected, offers further short-term support for the economy while setting out a medium-term roadmap for narrowing the budget deficit.
The deficit is now estimated to peak at 17% of GDP in the financial year just ending (compared to an estimated 19% in November) and is projected at 3% in 2025/6. Public sector net debt is projected to peak at 110% of GDP in 2023/4 (similar to November's projection).
The economic forecasts upon which it is based again look conservative to us, and we think that the deficit will likely turn out smaller, and will shrink faster, than the Office for Budget Responsibility and the Chancellor assume. The most optimistic scenario the OBR feels able to present is an eventual return to the previous trend line, whereas there is a good chance that the economy will overshoot that previous trend line for a while.
The short-term support includes an extension of the jobs furlough scheme to September, an extension of business rates and stamp duty holidays to June, and large capital allowances for business in 2021/2 and 2022/3. The extra net stimulus to aggregate demand will be £59bn (2.8% of GDP) in 2021/2 and a further £8bn (0.4%) in 2022/3, before tightening building to £30 bn in 2025/6. Support for capital spending will likely continue beyond 2022/3 as the UK Infrastructure Bank gets going, though its estimated impact (and funding) is not yet clear. There is also a growing emphasis on sustainability, though specific measures are small in scale (a pending green bond from National Savings, for example).
The medium-term revenue-raising measures are focused on the corporate sector, where the main rate of corporate tax is set to rise (as the government told some newspapers beforehand) from 19% to 25%. It will happen in one instalment, rather than being phased in, but not until 2023/4. In 2025/6 the higher rate is projected to raise an extra £17bn.
Personal income tax and capital gains tax rates are unchanged. There is no wealth tax. Personal tax allowances, however, will be frozen from 2021/2, which is projected to raise an extra £8bn per annum in 2025/6.
The eventual increase in corporation tax is large, though the UK will still have relatively low corporate taxation by international and historical standards. Ignoring exemptions, it might reduce post-tax income relative to what it might otherwise have been the case by around 7% (new post-tax income will be 75% of pre-tax income, in place of 81%, a proportionate reduction of 75/81, or 7%). Despite the careful leaking of the news beforehand, it is unlikely to be fully priced-in. That said, there are some further short-term gains to help sweeten the pill, as noted; and the main corporate story in the years ahead will still likely be a strong rebound in post-tax income, higher rates notwithstanding, simply because global and UK profits are going to rebound sharply as economies recover (and more).
When the dust has settled, we doubt that the budget will affect the relative attractiveness of the UK stock market significantly: indeed, from a top-down perspective the UK may have recently become more attractive to investors, even with the budget in the wings. In fact, there isn't much dust to begin with: the UK stock market and sterling are little changed on the announcements, and while gilts are underperforming a weak global bond market, that would be more consistent with a positive growth shock than a negative one.
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