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Budget 2020 in review – back to the 1950s with Rishi Sunak

George Trefgarne summarises the spring Budget, including what it might mean for savers and investors.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

It was spend and borrow and spend some more from Rishi Sunak’s first Budget as the new Chancellor of the Exchequer.

Given he only had three weeks to prepare it and the full ferocity of the coronavirus is only now becoming apparent, his strategy might have been cobbled together but was very clear. He wants to support the NHS and small businesses through the short term health and economic crisis, then embark on a long-term spending spree on public services, infrastructure, science and low carbon projects.

Old fashioned spending

Before he stood up in the House of Commons, a drum roll to his debut was provided by the Bank of England. In a reassuringly co-ordinated move, the Bank cut 0.5% off interest rates, taking them back to 0.25% and loosened capital requirements for banks, to enable them to lend more.

By 2024 Mr Sunak intends to spend an additional £57 billion compared to that planned by his predecessor, Philip Hammond, who himself presided over the highest tax burden since the 1970s. In four years’ time, Mr Sunak will become the first chancellor to spend more than a trillion pounds in a single year.

He forecasts that this will be financed by some £33 billion of additional borrowing per year and the rest made up of some tax rises. They include £14bn of retained customs duties and membership payments no longer owed to the EU; £7 billion from abandoning a cut in corporation tax; and the near-elimination of entrepreneurs relief and the red diesel loophole. He has also had a windfall from lower interest rates on Government debt.

Mr Sunak said this would take the level of Government investment back to distant pre-Thatcherite levels last seen in 1955. A time when Clement Attlee, the Labour Prime Minister, then Sir Winston Churchill, conducted a massive investment programme in order to rebuild the country after the War, notably on housing and the welfare state.

Pensions, healthcare and infrastructure

No doubt savers and investors will be relieved to see they can effectively make more tax-free pension contributions. The level the taper kicks in was raised to incomes of £200,000, partly to accommodate doctors and surgeons.

Compared to his 1950s predecessors, Mr Sunak’s spending is focused more on infrastructure, including a road and rail programme, building 40 new hospitals, moving to a net zero carbon economy and research and development. While the spend might take some time to pay dividends, the post-war generation might feel quite happy with his somewhat nostalgic economic philosophy.

What infrastructure spending could mean for businesses

This wartime spirit is also echoed in the huge worry overhanging the Budget: the spread of the coronavirus. That is a massive uncertainty, which he hopes will be serious but temporary and ameliorated by £7 billion for the NHS and small businesses. But the Office for Budget Responsibility (OBR) was clearly unable to incorporate it into its forecasts.

Planning for unknowns – there’ll be more to come

The OBR has pencilled in growth of 1.1% this year. Such an outturn is extremely unlikely. There is a serious risk of a short term recession if, as feared, a fifth of the working population are infected in coming months.

This somewhat depressing thought leads us to the two really big questions left by Mr Sunak’s Budget. Are there some large tax rises being secretly prepared somewhere in the Treasury to pay for all this? And how come he left untouched some of the many distortions in the system, such as the high levels of stamp duty and the Help to Buy and Student Loan systems?

On the first point we must assume that if growth does disappoint – and there is currently a real risk of that – then substantial tax rises will be required to balance the books. Equally, the ultimate economic recovery from the coronavirus might be very rapid.

On the second question, the Budget suggested that the Boris Johnson regime is fitting neatly into a continuum started by Tony Blair’s chancellor, Gordon Brown, in not really being sympathetic to the idea that tax cuts stimulate investment, growth and productivity. Reform is not a priority.

In July, there is a Comprehensive Spending Review in which individual departments will receive their allocations. Later in the year, there will be another Budget. Both of these documents are likely to be more about investment and spending than tax cuts. Yet, with interest rates back at the record low, that may be no bad thing.

George Trefgarne is CEO of Boscobel & Partners, a political consultancy

This article is not a personal advice. Hargreaves Lansdown may not share the views of the author.

HL is not expressing a view on the merits or otherwise of any of the policies or any of the political parties, and nothing in this note should be taken to be an endorsement or recommendation of any particular party, candidate or policy.


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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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