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UK Budget 2020

Large spending boost

13 March 2020

3 minute read

The Chancellor of the Exchequer, Rishi Sunak, made his Budget speech to the House of Commons, on Wednesday 11 March. In the summary below, our investment team reflects on the likely economic impact of the Budget announcement.

As anticipated by many, the Budget presented by Chancellor Sunak on Wednesday was one of the most expansionary in recent years. Helpfully, that should offset the economic disruption caused by the coronavirus outbreak to some degree. The economic stimulus from this year’s Budget should be further reinforced by this morning’s interest rate cut by the Bank of England. While helpful to short-term domestic growth, the Budget will be of little immediate consequence to investment portfolios, which tend to be largely diversified beyond UK assets.

Main points: Fiscal loosening

Fiscal spending: combating the viral outbreak

A large portion of the Budget is being used to counter the economic shock from the coronavirus outbreak. The chancellor has earmarked £7bn of emergency funding to help the public cope with the virus. There’s also an extra £5bn being allocated specifically to the NHS. Alongside that, the chancellor committed to provide the NHS with unlimited financial resources to combat the virus. Additional measures unveiled include extending sick pay benefits to people forced to self-isolate, as well as pledging to foot the sick pay bill for small-medium enterprises for 14 days. All this comes on top of an extra £18bn worth of spending earmarked by the chancellor to boost the economy.

Public investment: more spending

As promised, the chancellor announced a significant boost to infrastructure spend. As a whole, £600bn worth of investment spending in infrastructure and industry was pledged, to be spread over five years. The announcement will mean that public investment spending will hit its highest levels in more than 60 years.

Economic projections: growth forecasts downgraded

Growth forecasts from the Office for Budget Responsibility (OBR), the UK’s fiscal watchdog, were a little more downbeat than expected. The OBR now expects the UK to grow by 1.1% this year, down from 1.4% as originally expected. This downward revision doesn’t take into account the negative impacts of the coronavirus outbreak however.

Public finances: a jump in borrowing

Given the size of this year’s fiscal package, much of the extra spending will be funded through additional borrowing. Forecasts for government borrowing have jumped significantly as a result. For 2020-21, the government is forecasted to borrow up to 2.4% of national income, up from 1.8% as initially forecasted last year. In 2022-23, borrowing is forecasted to be 2.5% of national income, up from 1.5%.

Comment

The Spring Budget did little to affect our immediate investment outlook. The Budget speech has long since ceased to be a market-mover. Global events such as the recent collapse in oil prices or the widening coronavirus outbreak matter far more for investment portfolios.

Overall, the Budget should provide some help in offsetting the economic shocks of the coronavirus outbreak. This morning’s interest rate cut from the Bank of England should further reinforce this offset. The extra public investment spend being pledged is welcome – post-crisis productivity growth in the UK has been exceptionally weak. If executed correctly, the extra investment spending will help lift average worker productivity and wages. Here, the tricky bit is making sure that the extra money will be spent efficiently on the right projects.

Further out, the final outcome of the Brexit trade negotiations arguably matter more for the UK’s public finances. A smooth transition out of the Single Market would be helpful in reducing uncertainty among businesses. This should lead to more business investment spending among domestic firms, thus boosting growth and giving the chancellor extra fiscal headroom. On the other hand, a no-deal scenario may worsen the state of the UK’s public finances through lower tax receipts and higher fiscal spending.

It is also worth remembering that economic forecasts, particularly beyond the very near term, should not be accorded much oxygen. There is no particular reason to accord their new long-term forecasts any greater weight now. Given the inherent difficulties of formulating multi-year economic forecasts, we would take the OBR’s growth and borrowing projections with a pinch of salt.

Read EY LLP’s report on the Spring 2020 Budget containing all the changes and measures announced in the Chancellor’s Budget announcement [PDF, 138KB]

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