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Budget 2020

A bumper Budget from the UK’s Chancellor heralded a new fiscal era for a country setting out its own trading arrangements outside of the EU but dealing with the immediate impact of the Coronavirus (Covid-19).

Delivering his first Budget against the backdrop of the global outbreak of Covid-19, Chancellor Rishi Sunak had a considerable challenge on his hands.

Faced with an uncertain economic outlook, the recently appointed Chancellor made the choice to borrow to do “whatever it takes” to protect the economy and citizens from the impacts of the virus. The Chancellor announced a blizzard of measures to support businesses – particularly SMEs – whilst also announcing significant increases in spending in what he has described as the “largest sustained fiscal boost in 30 years”.

But with the economic impact of Covid-19 still unknown and a trade deal with the EU set to conclude by the end of 2020, the Chancellor may face some difficult choices in the Autumn.

Economic forecast

The OBR’s forecasts present a decidedly mixed picture, with the UK economy expected to grow slowly over the next five years amid a predicted growth cut this year, in 2022 and 2023 – although the picture for 2021 looks rosier.

It is important to note that these forecasts were produced before the outbreak of Covid-19 – now declared a pandemic – and before the Government and markets’ response to this. As such, the OBR could not include the impact of this in its projections.

Having said this, the forecasts do reveal that aside from the economic headwinds created by Covid-19, the UK’s fiscal position wasn’t as strong as the Government would have liked, with figures showing the slowest growth since 2009 and the OBR revealing that Brexit has led to the economy being 2% smaller than it would otherwise have been.

The Chancellor’s response has been to deliver a Budget that decidedly ends the Conservative era of austerity, with the scale of spending and borrowing surpassing that promised in the Conservative Party’s election manifesto. Rather than aim for Budget balance and a clear decline in the debt-to-GDP ratio – as the previous two Conservative governments have done – the new administration is content to loosen the purse strings and borrow significant sums.

OBR and Barclays GDP forecasts*

2019

2020

2021

2022

2023

2024

Estimated

OBR

Barclays

OBR

Barclays

OBR

OBR

OBR

1.4%

1.1%

0.9%

1.8%

1.0%

1.5%

1.3%

1.4%

*OBR forecasts were calculated on February 14 and based on assumptions that the spread of the virus would not be as significant as it has proven.

How does the OBR produce its forecasts?

The Office for Budget Responsibility (OBR) was created in 2010 to provide independent analysis of the UK’s public finances. It is tasked with producing detailed five-year forecasts for the economy and public finances twice a year, which accompany and inform the Government’s Autumn Budget and Spring Statement.

The OBR uses a large-scale macroeconomic model for the production of its economic forecast, which is jointly maintained and developed by the Treasury and the OBR. It works with various Government departments to gather numerous separate forecasts for different categories of revenue, spending and financial transactions, which it then collates and uses to generate aggregate forecasts for spending and tax receipts and for the various measures of public sector borrowing and debt.

Taxation

In an attempt to maintain a competitive tax environment, the Government has decided to keep headline corporation tax at 19% in 2020. Importantly, the Government has recommitted to a Digital Services Tax – its plan to implement a 2% levy on sales for certain digital businesses such as Facebook and Google – by 1 April, despite US opposition to the plans.

To support the high street, Government is increasing and expanding the business rate discount for retail properties, introducing a new pubs discount and extending the local newspaper discount. Importantly, a fundamental review of business rates is also being launched, with the aim of reducing the overall burden on businesses, improving the current business rates system and considering more fundamental changes in the medium-to-long term. A call for evidence will be published in Spring 2020, with a final report due by Autumn.

Meanwhile, fuel duty is to be frozen for its 10th consecutive year, whilst duties on spirits, beer, cider and wine are all to be frozen. However, tobacco taxes will continue to rise by 2% above the rate of retail price inflation. 

In terms of personal taxation, the tax threshold for National Insurance Contributions will rise from £8,632 to £9,500, taking 500,000 employees out of the tax altogether. Beyond the scrapping of the ‘tampon tax’ (5% VAT on women’s sanitary products), there were no other new announcements on income tax, national insurance or VAT.

Spending

Announcing a package of spending measures that the OBR has described as the “largest sustained fiscal boost in 30 years”, the Chancellor has sought to deliver a Budget that not only delivers security in challenging times, but also “lays the foundation for prosperity”.

“Levelling up” through infrastructure investment

Since the General Election, this Government has prioritised it’s “levelling up” agenda for UK regions and has sought to reflect this in its first Budget, announcing measures aimed at raising productivity and growth in all nations and regions across the UK. Focusing on roads, railways and digital networks, the Government announced over £27 billion to be spent between 2020 and 2025 as part of the second Road Investment Strategy – enough to fill in around 50 million potholes across the country – and £4.2 billion for five-year, integrated transport settlements for eight city regions.

The Government has also committed £5 billion to support the rollout of gigabit-capable broadband in the most difficult to reach 20% of the country and provided funding for the Shared Rural Network agreement aimed at radically improving mobile coverage in rural areas – an issues for businesses across the country and a bugbear of MPs. 

Despite the focus on infrastructure investment in the Budget, the Government has delayed its long-awaited National Infrastructure Strategy – originally due to be published alongside the Budget - to “later in the Spring”.  The detailed 30-year plan contains vital funding projects for transport, local growth and digital infrastructure, and also acts as the Government’s formal response to a now two-year-old National Infrastructure Assessment, which was the product of an impartial commission set up when David Cameron was Prime Minister. The Strategy – now expected before May – will be refocused to reflect the larger resources the new Chancellor has made available. 

Backing businesses 

Keen to show support for British business in the new post-Brexit era and as part of the “level up” agenda, the Government has announced measures aimed at supporting SMEs across the UK. This includes the extension of the funding of the British Business Bank’s Start-up Loans programme to the end of 2021-22, supporting up to 10,000 further entrepreneurs to access finance to start a business and an additional £5 million invested in ‘Be the Business’, the business productivity lobby group, to expand its national productivity campaign in order to support SMEs to improve productivity.

The Government is also investing £10 million to increase Growth Hub capacity and is helping businesses export by extending and increasing the lending capacity of UK Export Finance (UKEF) with a new £2 billion lending facility - a measure that will be particularly valued by businesses in the context of the UK’s exit from the EU.

Investing in innovation 

There has been a significant step change in Government spending on R&D, which is particularly important to the Government’s post-Brexit aim of becoming a world leader in science. Announcing plans to increase public R&D investment to £22 billion per year by 2024-25, the Government has placed the UK among the top quarter of OECD nations with 0.8% of GDP spent on innovation. 

This includes investing over £900 million to ensure UK businesses are leading the way in high-potential technology and sectors, including nuclear fusion, space, electric vehicles and life sciences. As part of this, the Government will also be investing at least £800 million in a new blue skies research agency, modelled on the success of the ‘APRA’ in the US. The agency will help coordinate Government support for high risk, high reward science investment.

Growing a greener economy 

In the year that the UK hosts the COP26 UN climate summit, the Government has announced a raft of measures aimed at decarbonising the economy and generating green economic opportunities across the UK.

Announcements included a Carbon Capture and Storage (CCS) Infrastructure Fund to establish CCS in at least two UK sites and the allocation of an additional £10 million in 2020-21 to support the design and delivery of net zero policies and programmes. The Government will also be consulting on a Green Gas Levy to help fund the use of greener fuels and the introduction of a new grant scheme from April 2020 to help households and small businesses invest in heat pumps and biomass boilers.

The Budget also includes investment in electric vehicle charging infrastructure – important to encourage the take up of electric vehicles – and provides £532 million for consumer incentives for ultra-low emission vehicles. 

Supporting those affected by Covid-19

The Chancellor began his first Budget by setting out a £12 billion package of temporary measures targeted at supporting public services, individuals and businesses through the economic disruption caused by Covid-19. This coincided with the Bank of England’s announcement of an emergency interest rate cut, taking borrowing costs back down to the lowest level in history to help manage an economic shock.

Official Bank Rate (Source: Bank of England)

On public services, the Chancellor promised that the NHS would get whatever help it needs “whatever the cost”. For individuals, he announced that Statutory Sick Pay will be available to anyone advised to self-isolate and anyone that has been diagnosed, and those that do not qualify for sick pay will be able to claim benefits from day one, with the minimum income level temporarily removed from Universal Credit.

Finally, for businesses, the Government will bring forward legislation to allow SME employers to reclaim Statutory Sick Pay paid for sickness absence due to Covid-19. It will also abolish business rates this year for firms in the retail, leisure and hospitality sectors with a rateable value below £51,000, whilst a new Covid-19 Business Interruption Loan Scheme, delivered by the British Business Bank, will see banks offer loans of up to £1.2 million to support SMEs.

Competition and regulation

Alongside its taxation and spend measures, the Government has also announced a number of reviews and consultations aimed at boosting competition and regulation, particularly across the digital economy and financial services. 

Despite a long wait following the recommendations of the Furman report on digital competition, the Government has now accepted all six of the recommendations made, committing to consult on these in due course. As part of this, the Government has also committed to creating a new cross-regulatory taskforce – the Digital Markets Taskforce – to increase coordination between regulators within areas related to digital competition. While many may assume the UK’s sector regulators already oversee such coordination, the existence of this new group will be a welcomed addition to the policy landscape.

The Financial Services Future Regulatory Framework Review – first announced at Mansion House in 2019 – was the first phase launching a call for evidence on regulatory coordination. The Government has now published its response alongside the Budget, announcing a new forum to bring together Government and regulators and to provide industry with a forward-look of upcoming regulatory initiatives in the form of a ‘Regulatory Initiatives Grid’. The next phase of this review – which aims to develop a “more coherent approach to FS regulation” – will be taken forward in a White Paper on Financial Services, which is due in the Spring. 

This Budget has also seen the announcement of a major review into the FinTech sector, led by Ron Kalifa OBE. The review will identify what more industry and Government can do to support growth and competitiveness, to ensure that the UK maintains its global leadership in this vital sector – an ambition the UK Government remains anxious about. As part of its efforts to promote the UK’s FinTech sector, the Government have also committed to further work in support of Open Finance reforms, which come as a natural evolution to previous data reforms brought about by Open Banking.

Finally, the Government has launched a number of consultations to inform the Financial Services Bill announced at the Queen’s Speech. This includes a consultation on market access arrangements for Gibraltar and a Policy Statement on Prudential Standards which states the UK’s intention to implement Basel III banking standards in the UK.

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