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UK Budget 2020: Large spending boost
In this podcast, published 12 March 2020, our panel of experts discuss the changes announced in Chancellor Sunak’s Spring Budget, as well as the measures taken in an attempt to offset the economic disruption caused by the coronavirus, and what all this may mean for your investments.
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Welcome to Word on the Street, a weekly podcast from Barclays UK where our experts help ordinary investors make sense of the latest news and events impacting the world’s financial markets.
For this spring budget special, our panel of experts will discuss the implications of the government's recent budget announcement. The information is intended to provide only a general outline of the subjects covered in the Spring Budget. It should not be regarded as comprehensive or sufficient for making decisions nor should it be used in place of professional advice.
PHIL ATTREED: Hello and welcome to this Word on the Street Budget Special. I'm Phil Attreed, Barclays Head of Investment Consulting, and I'm joined today by a quartet of our experts: our ever-present CIO Will Hobbs, Lee Platt, one of our senior wealth planners, Sophie Traherne from Government Relations, and a special Budget appearance Emma Hosking-Williams from Ernst & Young's Private Client and Trusts team. A lively day for news flow yesterday, even by recent standards. We’ll look to not only cover off the Budget, but an interest rate cut from the Bank of England and further market volatility. So Emma, welcome. This was the Budget held over from last year, given the seemingly endless Brexit focus and it's the first one of two actually for this year. Maybe you could just start us off with some of the big takeaways as you saw them.
EMMA HOSKING-WILLIAMS: Absolutely. Thank you very much for having me, Phil. The new Chancellor delivered his first budget speech yesterday and whilst it was primarily focused on the UK government's response to the coronavirus and the stability of the UK economy, there were a number of personal tax measures announced. One of the key announcements which will be of interest to investors was the reduction of the lifetime limit for entrepreneurs’ relief.
With effect from yesterday, the lifetime limit on gains eligible for entrepreneurs’ relief was reduced from £10m to £1m. Now this represents quite a significant reduction which will no doubt be disappointing for investors who had planned to make use of this relief and may now no longer be able to do so. The measures will generally apply to disposals made on or after 11th of March 2020, but for stalling rules do exist that can also impact certain disposals prior to that date. Also some changes announced in relation to pensions: from the 6th of April this year, the threshold income and adjusted income threshold for the purposes of the tapered annual allowance will increase to £200,000 and £240,000 respectively. This will be a welcome change for a number of people and will mean that individuals with income below £200,000 should not be affected by the tapered annual allowance going forward.
The minimum amount to which the annual allowance can taper down to will reduce from £10,000 to £4,000 from the 6th of April this year as well. However, this measure should only impact individuals with total income including pension accrual of over £300,000. The Chancellor also announced that the National Insurance threshold would increase to £9,500 from the 6th of April this year and this is in line with the government's aim of aligning National Insurance and income tax thresholds. The increase in National Insurance threshold will represent an annual saving of around £100 for individuals. And one final point that might be of interest to individuals was the announcement in relation to fuel duty and the Chancellor confirmed that fuel duty would be frozen again for the tenth year in a row.
PA: Fantastic, thanks Emma. So Sophie, from a political perspective, is there a feeling maybe that the Chancellor could have held back on some of the anticipated personal tax changes in favour of more of a focus on addressing coronavirus.
SOPHIE TRAHERNE: Yes, this clearly was not a normal Budget, given the focus on the situation with coronavirus. The Chancellor, who as a reminder has only been in the role for barely four weeks, started his Budget Day speech by talking about what the government was doing on the virus rather than the traditional start to Budget, which is the economic forecast OBR (Office for Budget Responsibility) overview. He very much had to reassure businesses, citizens, and indeed the markets that the government is taking the necessary steps to prevent public health and economic damage as a result of the virus.
The package was fairly extensive. You'll no doubt have seen the headlines: over £30bn to help support the economy, including £5bn emergency response for the funding for the NHS, £500m hardship fund for local authorities to support vulnerable people, a commitment on statutory sick pay. There was also a real focus on supporting small businesses who might be impacted: business rates relief packages, support for the self-employed, etc. This was very much a coronavirus-focused Budget as the Chancellor started his speech. But he did also have to try and meet some of the promises that were made to the millions of people who voted Conservative, some for the first time in their lives in December.
So this combination obviously amounted to a significant amount of extra spending which comes to your point about anticipated personal tax changes. And it does seem that some of the more divisive revenue-raising measures have been delayed. Obviously there were some that we mentioned – entrepreneurs’ relief for example – but in general the view seems to be that we could have a particularly interesting Autumn Budgets this year when some of those tax changes, the revenue raisers, could come to the fore.
PA: Thanks Sophie. And so Lee, possibly a quieter today than anticipated for you and your colleagues in Wealth Planning, but one of the big areas of speculation was pensions. Emma touched on it there, the possibility of a raid on pension tax relief. That didn't materialise and in fact actually there was some relief higher earners as Emma mentioned. Could you just touch on the opportunity that may now present itself?
LEE PLATT: Thanks, Phil. The increase in the tapering of the annual allowance was really mentioned in the Budget towards targeting high earners within the NHS, so consultants. So of course everybody that's impacted by that change, as Emma just mentioned, will also benefit from this increase in the thresholds to being affected by the pensions taper. It does give rise to some great opportunity for people that found themselves impacted previously by the tapering of the annual allowance, which meant ultimately their annual pension contributions were tapered down from the maximum £40,000 to potentially down to £10,000. This will give scope to people who were previously affected by that to ultimately have a look at the position and encourage all individuals of course to seek advice. Pensions can be a fairly complex and technical area so to make sure that you're fully aware of any opportunities do seek advice and follow that through.
PA: As Sophie says possibly an area that might get revisited in the second budget of the year later on in the autumn. So moving on. I think a major concern for local communities and small businesses around coronavirus has very much been the impact of containment and the potential for lock down and would local businesses survive. Really I suppose the question is: was the Budget the medicine small businesses need to get through that? Emma and then Will if I can come to you:
EHW: Absolutely and I think it would be very much a case of wait and see. Sophie touched on a few of the measures that were brought in yesterday. We've got the statutory sick pay measures, increases to certain business rates, there’s a new temporary coronavirus business loan scheme that's being introduced, and also measures around time to pay that the Revenue are going to introduce to help those with outstanding tax liabilities in financial distress. So I think there were certainly a number of measures introduced but as I say I think it'll be a case of waiting to see what the impact is and how far those measures go to help address that.
WILL HOBBS: That's exactly right, I’ve hardly anything to add to Emma’s comments there. I would point out just what we're looking at the moment and the latest data we've got in terms of fatality and reproduction rates. Actually this comes from South Korea and South Korea is the country which has done the most extensive testing, a lot of other countries have found trouble with this. And so we're getting a lot of skewed data from other countries. But if you look at the experience of South Korea, you're so far seeing a case fatality rate or about 0.6% so six people in every 1,000 sadly dying and a reproduction rate that looks roughly similar to kind of seasonal flu.
Now you might even argue at that 0.6% is skewed heavy, some are arguing that that's skewed heavy by the fact that people only go to get tested if they get relatively severe symptoms. So there's a severity bias within that number. So overall this is a serious disease, a serious threat but a lot of the measures you're seeing from the Bank of England and from the government yesterday are really about facilitating social distancing, facilitating containment, so that you can what's called flatten the curve (i.e. you get the same number of overall cases over a period of time but you buy your hospitals and medical facilities, health care facilities time to treat them). What you tend to find or history teaches us and first of all I have to say that I'm not an expert in this subject, I’m parroting other experts that we get access to, but what you tend to have found historically is in some of these situations, if you get panic and also fragile health systems in general that can be the more dangerous thing in many ways because a lot of the people who suffer during these outbreaks can be people who are not actually affected directly by the disease in question. It can be other stuff that comes along that they are no longer able to get treatment for so the government is buying time for the social distancing to work and what we can see is that there is a significant and as yet indeterminate hit coming down the pipeline to the UK economy. But in our opinion at the moment it's still likely a temporary hit and one that is digestible even if the economy might experience a technical recession.
PA: Will, this I think felt like it's spelt the end to some of the more recent austere Budgets that we've been used. What does the extent of the spending really mean for the UK economy, in terms of the broader Budget?
WH: The OBR numbers don’t I think account, they're looking at COVID-19 as a China phenomenon and there's not some of the more recent factors not- put in either, so the oil price shock that we've seen at the beginning of this week. So the borrowing may be slightly greater than the headlines appear. But our suspicion here is that if I could borrow for 0.5% for 10 years I'd borrow a lot more than I currently am, I’ll tell you. Remember that governments have had the ability to raise taxes and they have a monopoly on tax raising and so they generally can sustain quite a lot more borrowing than people realise. I think with borrowing costs so low and it all depends on what you spend it on obviously but I don't think the amount of debt the UK owes at the moment is necessarily a problem just in isolation but they have to find productive ways to spend that money that's the important thing.
PA: And I was going to touch on exactly that. I suppose the question on a lot of people's minds is: how can they afford that spending without that taxation coming through? Is that really because of the borrowing rates that we're seeing at the moment?
WH: I think that's a large part of it but you may find eventually that tax rates have to go up again. But the key again for long-term sustainability of debt is productivity and that is where some people are saying that the OBR’s long-term forecasts are a little bit optimistic on the UK's productivity profile. There's certainly a bit of work that the UK needs to do to make us a more productive economy and I guess that is part of the levelling up agenda that this administration has been talking about. But there's a lot to do here and there's a lot that if you can borrow at that rate for 10 years and beyond, then it makes the threshold of projects that you should be able to find that beat your cost of capital, cost of funding essentially. There should be more of them around so there are things that the government can do and we hope that they're going to do them.
PA: So Sophie, turning to you on that levelling up point. Does this deliver on the Conservatives’ manifesto pledge of levelling up inclusivity across the UK? I think there was even at some point the reference to their being the real “Workers Party”.
ST: Yes. When talking about increasing National Insurance threshold, the Chancellor also mentioned changes that the Conservatives made previously to national living wage and income tax and then he said the Conservatives are the real “Workers Party”. This obviously shows that shift in the Conservative Party economic ideology that's happened as a result of the election at the end of last year. As we know that conservatives are broke through those red wall seats in the North, Midlands, and in parts of Wales. As a reminder 114 new MPs, 106 of those are Tories and of those 106, 54 seats were taken from Labour in the North in the Midlands. So this Budget was about honouring those manifesto pledges to those northern heartlands. Lots on infrastructure investment, so the levelling up agenda: road investment, potholes, even a new northern economic campus was announced. So a lot in there as well as corona. But a lot in there on the levelling up agenda and that was obviously something the government were always going to want to get across in this Budget.
PA: And just staying with you there. Any early murmurings of things to come, particularly thinking ahead to the second budget of the year?
ST: It's very early days, I think with Budgets is well. The couple of hours and days afterwards, they're always the more telling about what's actually going to make the headlines, so I would just stay tuned and keep looking at the news really.
PA: Great thanks, Sophie. Lee, just turning back. We mentioned earlier on the National Insurance changes, so about £100 or so in every workers’ pocket through the National Insurance threshold boost. But I've seen some comments there and that our listeners might be interested in about a loophole that some employees in this income bracket do need to be aware of.
LP: Yes, certainly. So although the National Insurance increase will be welcomed by many, there is this potential risk where people that are falling out of a National Insurance need to make sure that they're still being eligible for pension credits and to make sure that those are still being topped up. The risk of course being that it's something that isn't noticed and you find out a later stage that you're falling short and might have to make some additional contributions later on down the line. So really important for people that are eligible to that that they do check. If you're uncertain, speak to a financial advisor or Citizen’s Advice bureau to see exactly where you stand.
PA: Great, thanks Lee. And just sticking to you and then we move on to Emma. Anything else that you've seen that our listeners should ensure that they're on top of from a personal perspective?
LP: There was lots of anticipated changes of course. Most of these didn't come to fruition in the Budget but one of the big areas that does remain topical is of course inheritance tax. We were expecting a few overriding changes, none of those came to fruition at all but it's still a highly topical area. The government raised record-breaking £5.4bn of IHT revenue in the last financial year and all indicators looked to show that that will increase year upon year. It's no news for some people, could be good news, so for people that are looking to put in plans or have been holding off making any plans for potential changes in the Budget, then it's important that again they seek advice to make sure that those plans and objectives are seen through.
PA: Thanks, Lee. Emma?
EHW: I think really just to echo Lee's comments. Obviously there was a great deal of speculation around the inheritance tax as a result in the reports that the government has issued recently. I do think it's going to be a bit of a watch this space on the inheritance tax front. Otherwise it was a fairly quiet Budget on the personal tax side so I do think that over the next few months we are going to have to watch this space and see what further developments there may be, which I suspect there will be some in the budget later in the year.
PA: As I mentioned at the beginning, yesterday also started pretty early, 7 a.m. actually, with the interest rate cut 0.5% stole the thunder a little bit, so back to know when to 0.25%. We obviously thought that Mark Carney's job as a governor was largely done but, Will, what was the thinking behind this and I suppose the real question for investors will that actually make a difference?
WH: In this situation you could probably argue that the central bank is a bit less powerful than the government in some circumstances because if you think about it, in a social distancing scenario where you're trying to contain the virus, one the worst affected parts of the economy are the bits that rely on social contact, so restaurants and all that all those parts of the leisure sector and travel sector which are currently worst afflicted. Now are cheaper interest rates going to induce me to change my behaviour which are being changed because I worried about catching COVID-19? Probably not in the short run but it is part of the package that is kind of easing some of the stress on companies I would argue. There probably more coming from the world central banks, you'll see more of this but I think people are arguing that the most potent reactions should come from the governments themselves, that fiscal packages are things that are probably going to ease the strain most powerfully in this situation, which like I say we still expect to be transitory.
PA: Clearly for savers interest rates going down to 0.25% is going to be a big worry, particularly if that persists for a while. But I suppose with the rate cut, with government spending splashing the cash a little bit again there, and also stock markets now off over 20% year-to-date, we've seen some big moves in recent days, we'll touch on that in a second, but is now a time for investors to be being brave and I think particularly for some of our investors as we move into the end of tax year, thinking about topping of ISAs before that allowance runs out?
WH: This is always going to sound self-serving but the point that I would make here and I think it's a really important one. It's just: remember why you are investing in the first place. Now the point that we harp on about ad nauseam – people stick their fingers in their ears whenever I approach nowadays that may not just be because of this comment – but that the point is about investing is: it’s productivity. You're trying to access the world's future productivity, humankind finding more ways to do with less. And the point about that is that that innovation and the dissemination of innovation from everything from the Excel spreadsheet to the humble shipping container to the upcoming advances in artificial intelligence, that allows companies to do more with less and the profits drop through to the bottom line and full flow through to shareholders. So over time if you look at the long term charts of shareholder returns, you find that that's much more often up than down. Now the point about this is that there is no change in our opinion to the medium-term prospects for humankind's productivity. Actually I would argue that those prospects for productivity are more firmly founded than they've been for some time in some way in the fact that you've had spreading wealth and educational opportunities, which allow us to maximise humankind's incredible resources. So all that's happened in the last few weeks is that the ticket, the price of the ticket to access all of that innovation has come down quite sharply. So I would suggest that it's a very good time for investors who are able to look beyond the next few months and years to access that ticket of a diversified multi-asset class portfolio or fund.
PA: And we have seen some sharp moves in in recent days and we cover that off in a lot of our investment updates but any final words just around the moves that we've seen in the last 24 hours or so?
WH: There's a bit of panic out there and people are trying to… the difficulty with this situation always is that you're dealing with a total unknown. The interesting thing is you're only really starting to see the economic effects of the containment efforts to come through. We’ve seen them in China for some time, but China is actually starting to bounce back, workers are returning to work and you're seeing factories start to get back to business a little bit. And you're seeing all the high-frequency indicators get back to seasonal norms.
But for the developed world you're really only just starting to see the effects. Italy is obviously a slightly different case. So people are guessing at what comes next and some have got scary stories about that it's going to be bigger than the Great Financial Crisis and worse than this and you've got this oil price crash to throw into the piece which is causing little bits of stress in the credit pipelines here and there. Our point would be here though: remember is that when you got to the Great Financial Crisis, in a way many recessions are about correcting imbalances in the economy and they were large imbalances in the US private sector among other places around the world which were corrected viciously in the Great Financial Crisis. And that does tend to be the exception not the norm in terms of recessions.
But here this is not an imbalance correcting recession: it's an external shock and an exogenous shock to the economy. You are going to see some damage to the economy, permanent damage there's no doubt about that. Some parts of the services sector are going to suffer and this is what part of the measures we've seen so far have been about, trying to keep those businesses alive that are really going to struggle from lacking social contacts. But in our opinion you are going to see the most likely scenario is quite a sharp bounce back in global economic activity in the second half of the year. And from our perspective we're trying to look through all of this stress and we're seeing quite a lot of quite interesting investment opportunities in the world's capital markets where fear seems to be the getting the better of people's ability to rationally diagnose and assess what the correct price is for certain assets.
PA: Thanks, Will. We'll look to wrap up there. Thank you also to my other guests here in the room and thank you to our listeners for joining us once again for this Word on the Street Budget Special. Our thoughts remain of course with those impacted by the virus. Stay vigilant and we hope you'll join us again for our regular updates. If you do enjoy our discussions, please do share with your family friends and colleagues.
Head of Investment Consulting
Phil joined Barclays in 1999. His team work closely with colleagues and clients, helping investors meet their investment goals. Phil has held a number of roles across Wealth Management, Investments and Private Banking.
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Emma is a Director in EY’s UK tax practice and Head of the FS London and Channel Islands Private Client and Trust teams. She has over 12 years' experience advising clients on a broad range of personal tax and reward related issues.
Director Wealth Planning
Lee joined Barclays in November 2011 after 11 years working in the Life Company financial sector being based onshore and offshore. He has spent his career working in financial services across a broad range of specialist planning and advisory roles focusing around tax, trusts and insurance.
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Chief Investment Officer
Will joined Barclays in 2005 and now leads the team focused on the core aspects of the investment offering. With nearly 20 years’ experience in the financial sector, Will frequently contributes to Bloomberg, CNBC and more.
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Senior UK Political Analyst
Sophie joined Barclays in November 2018 after two years as a Government Special Adviser. She has spent her career working in politics, most recently working for the Secretary of State for Wales as his Special Adviser, working on policy, communications, legislation and political engagement.
Follow Sophie on LinkedIn.
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