March 2021 Budget review
The Budget presents a year of responsibility and opportunity for the financial sector
The March 3 Budget1 2 has come and gone; but where are we heading next.
My belief is that our sector should be looking to the future with a sober sense of responsibility, but also with a positive confidence that – with good fortune - the year to come will bring opportunity for growth.Alistair McQueen, Head of Savings & Retirement
The Budget came after a year like no other. The pandemic brought lockdown. Lockdown brought economic collapse. And economic collapse forced the government to spend big.
To highlight the scale of spending “big”, this time last year the government feared its response to the pandemic could be a whopping £15bn. Roll on twelve months, and the government is now resigned to a Covid bill of £344bn. To put that into context, £344bn is equivalent to every household in the land contributing about £12,000.
To fund spending big, the government has been borrowing big. It is now estimated that the government will borrow £355bn in 2020/21, up from a pre-pandemic level nearer to £50bn.
This was the scary backdrop that framed the March 3 Budget. And it presented the Chancellor, Rishi Sunak, with a stark choice. Option 1 was to take strong action now to reduce the debt, such as driving-up taxes, in a bid to balance the books. Option 2 was to keep on borrowing to support an economy and a working population that was still on its knees.
In the event there was a bit of option 1. But, on balance, Rishi pulled harder on option 2.
Against option 1, a number of personal tax freezes were announced, such as income tax bands, the pensions lifetime allowance, and inheritance tax thresholds. These freezes should increase tax revenues. And there was the signal of a significant increase in corporation tax from 2023 onwards. But he could have gone much further. The personal tax freezes could have been personal tax increases. Indeed, the Chancellor could have forgotten his Conservative Party’s manifesto commitment not to increase the rates of income tax, national insurance or VAT. But on the day, he did not choose to forget.
Instead, the Chancellor's choice option 2 means big spending will continue. For example, the furlough scheme and help for the self-employed has been extended. The £20-a-week boost to universal credit will roll on. The stamp duty on property purchases will be prolonged. And loyalty to the expensive state pension triple lock will remain. To fund much of this spending, borrowing will continue to boom. Throughout the next five years, borrowing will be (significantly) greater than the level that preceded the pandemic.
This is borrowing big, with even bigger fingers crossed behind the Chancellor’s back. From a health perspective, it is based on the hope that the vaccine will continue to beat the virus. And from a wealth perspective, it is based on the hope that interest rates, and cost of this borrowing, will remain low. If either of these two hopes falter, the Chancellor will be forced back to his Treasury drawing board, quickly.
The financial sector will be crossing its fingers too. While some sectors of the economy have been literally shut down by the pandemic, such as hospitality and high-street retail, the financial sector has avoided the strongest winds of the Covid storm. Indeed, recent official figures3 report that the financial advice sector was part of the third-fastest growing sector in the UK over the past year, after the delivery sector (including those such as Amazon) and the scientific research sector, including those delivering the Covid vaccine.
The advice sector typically serves an older and higher-income population. This population has been less exposed to the most challenging economic impacts of the pandemic, such as unemployment, wage drops and furlough. The March 3 Budget did not see the Chancellor looking hard at this population to foot the Covid bill, in the form of big tax hikes.
In addition, our sector serves a population that has seen saving levels boom over the past year. Lockdown has stopped spending, and this, coupled with understandable concerns about the future of the economy, has resulted in many of our customers saving like rarely before. More saving should result in more demand for our support.