Light at the end of the Tunnel

UK investor sentiment appears to have been boosted in recent times by the evidence that the UK’s Covid-19 vaccination programme is progressing well. More than 30 million people, including myself, have already received their first jab.

We are starting to see some “light at the end of the tunnel” now that the Prime Minister, Boris Johnson, has outlined the “roadmap” for the reopening of the economy in England. Non-essential shops, hairdressers, indoor leisure, and outdoor hospitality outlets are set to reopen on 12 April; further relaxations on social interaction will take place from 17 May; and the remaining restrictions are scheduled to be lifted on 21 June, although the progression to each stage will hinge on various criteria.

The UK economy is “poised like a coiled spring”, according to Bank of England chief economist Andy Haldane, who expects recovering consumer confidence to drive a strong rebound in economic activity. However, looking ahead, Ernst & Young has also warned that, despite the nascent recovery, many more businesses are expected to fail in 2021.

Budget 2021: no gain without pain

According to Chancellor of the Exchequer, Rishi Sunak, in his March 2021 Budget, the UK’s economic recovery is set to be “swifter and more sustained” than previously expected.

Nevertheless, the coronavirus pandemic appears likely to cast a long shadow over the UK’s finances for some time to come. Although the Office for Budget Responsibility expects the UK economy to grow by 4% this year and to have recovered to pre-pandemic levels by the middle of 2022,  it expects the economy to be 3% smaller in five years’ time than it would have been without the impact of Covid-19.

Borrowing is expected to hit a peacetime record of £355 billion in 2020-21, falling to £234 billion in 2021-22, and reaching £74 billion by 2025-26. Borrowing as a percentage of GDP is predicted to reach 10.3% this year, falling to 4.5% in 2022-23, and easing to 2.8% in 2025-26. Debt as a percentage of GDP is forecast to peak at 97.1% in 2023-24, falling to 96.8% in 2025-26.

The furlough scheme was extended until September: the Government will pay 80% of employees’ wages, with employers contributing 10% in July and 20% in August and September. Financial support for the self-employed was extended.

The current holiday on stamp duty – covering homes costing up to £500,000 – was prolonged until the end of June and the Government will provide guarantees on mortgages for homebuyers who can only afford a 5% deposit.

The business rate holiday was extended to the end of June, after which businesses will pay two thirds – to a maximum of £2 million –with a lower cap for businesses that have managed to remain open.

The Chancellor also announced a new “super-deduction scheme” in which companies that invest during the next two years can claim 130% of the cost against their tax liability. The rate of corporation tax will increase from 19% to 25% from April 2023. Companies with profits of £50,000 or below will pay a Small Profits Rate of 19%, which means that around 70% of companies will be unaffected by the increase.

Although income tax rates remained unchanged, the personal allowance was frozen at £12,750 from April 2022 to April 2026, while the higher-rate threshold was frozen at £50,270. The thresholds for inheritance tax, capital gains tax, and the lifetime allowance for pensions were also left unchanged.

Source: Adviser Hub, March 2020

Image: Photo by Warren Wong on Unsplash