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Our take on the Spring Budget 2021

The budget 2020

With much of the March 2021 budget pre-leaked, there were few surprises. Here are the key points you’ll want to know.

Safeguarding the economy, jobs and businesses

After a difficult 12 months, Rishi Sunak’s first priority is to inject money where it can be best spent to protect the UK’s ability to recover.

The furlough scheme is extended to September and two new rounds of grants given to the self-employed.

For businesses, the rates holiday will be extended and there will be no immediate rise in corporation tax, although larger companies will be paying a higher 25% rate in two years’ time (currently 19%).

Increased public debt

The fiscal support response to Covid has massively increased public debt. The ratio is expected to peak at 98% of GDP in 2023 – the highest ever in peacetime. This puts the economy at the potential mercy of interest rates and inflation, with the UK’s bill spiralling quickly if interest rates go up, which may be needed to keep future inflation under control.

Prioritising investment

To boost investment, the Chancellor has announced a 130% deduction for plant and machinery for two years. This is planned to unlock cash sitting in the hands of successful businesses and represents £25bn support for business. There will be new free ports around the UK with 8 locations in England announced. A new Infrastructure Bank will be established in Leeds with £25bn initial capital, and an expectation that overall £40bn will be invested in long term projects. Retail investors will have opportunities to invest in ‘greener’ National Savings.

Taxation – little change

Sunak successfully navigated the Tory manifesto commitment to not raising taxes.

Or did he? A number of tax threshold limits including IHT relief, CGT exemptions, pensions LTA and the income tax personal allowance were frozen for five years. The latter will first edge up to £12,570 in April. This effectively means higher taxation in real terms over coming years.

In a bid to maintain a buoyant house market, the Stamp Duty holiday has been extended to June, with further partial relief until September. First time buyers were gifted with a loan guarantee scheme which will drive the offer of 95% mortgages.

More resources are to be focussed on tax evasion. This is worth some attention, particularly in relation to IHT, where the need to consider lifetime transfers is sometimes overlooked.

How have markets reacted?

The FTSE 100 started the day up and finished roughly in the same place. Bond yields, perhaps the most direct measure of market sentiment, rose on the day with the UK 10yr Gilt yield now at 0.77%. This was a reversal of what has been seen so far this week, but given we started the year around 0.20%, it is a continuation of the present trend towards higher rates. A trend which Sunak referenced in his Budget speech.

The future trajectory of bond yields will undoubtedly play a big role in the performance of markets going forward, as well as the relative performance of different investment styles. However, action by the Fed is likely to carry more weight than changes in UK fiscal policy.