By Samuel Indyk
Investing.com – On Wednesday, the UK Chancellor of the Exchequer Rishi Sunak will stand in the House of Commons, open his red briefcase, and deliver a budget that is set to outline the path the UK takes, financially, over the coming months.
The speech normally begins after Prime Minister’s Questions at around 12:30GMT and is expected to last around an hour.
What to expect?
Since the pandemic struck in 2020, the UK has borrowed and spent billions on support packages, these include the government furlough scheme, weekly increase in universal credit and other business support measures.
At some point, Sunak will argue that the UK has to pay for it, but a fast unwind of support measures with no backstop could end up leaving the UK with soaring unemployment and businesses going bust.
With that in mind, emergency support schemes will likely get extended, if only temporarily.
The government’s Coronavirus Job Retention Scheme (furlough scheme) is scheduled to come to a conclusion at the end of April, and February survey data suggested 20% of the workforce was still on Furlough at the beginning of last month.
It is likely the Chancellor will extend the scheme through its April deadline as lockdown measures are not expected to be fully lifted until late June at the earliest. If the Chancellor does not extend the scheme, expect to see the UK unemployment rate skyrocket in the coming months.
It was reported over the weekend that the Office for Budget Responsibility (OBR) is going to revise up its growth forecasts as the UK vaccination effort appears to be working and the economy is forecast to resemble some form of normality by the end of the year.
“The potential for near-term increases in spending are also likely to be supported by the OBR’s updated assessment of the growth outlook,” analysts at Lloyds said in a research note.
Although Sunak has appeared relatively hawkish in recent interviews, the likelihood of a cut in spending and higher taxes appears slim for now. Focus will be on the Chancellor’s “levelling up” agenda and how he plans on supporting those areas of the UK that have struggled economically, outside of London.
The stamp duty holiday that was announced last year is likely to get extended. Currently, those buying a home pay no tax on the first £500,000 of a property’s price but the scheme is due to end on March 31. Expectation is that a cliff edge could mean many deals collapse if they do not complete before the deadline. The Chancellor is expected to announce an extension, but critics will argue that its just kicking the can down the road and the same issues will resurface at the next deadline.
Separately, Sunak is expected to announce a mortgage guarantee scheme that will offer 95% mortgages for properties worth up to £600,000. Before the pandemic, lenders issued many more of this type of mortgage but since it struck, the low-deposit mortgage market has “virtually disappeared”.
Reports suggest Sunak will announce increases in certain taxes as the UK attempts to pay for the pandemic. Corporation tax is expected to increase from its current 19% rate to 25%, although Prime Minister Johnson has reportedly stopped this from happening in one fell swoop and the likelihood will see a gradual rise throughout the government’s term.
“By discounting at 5-7% in perpetuity, we calculate that for a 6% increase in the tax rate (from 19% to 25%), FTSE 100 could lose 2-4% of its market cap,” analysts at GS said in a research note.
“We note that these figures are not large, and certainly in the near term what will matter more for UK stocks is the success of the Covid vaccine rollout and the eventual unlocking of the economy, which is progressing well.”
The Chancellor is also forecast to freeze the person income tax allowance, a stealth tax increase. The personal allowance is the level at which workers first start paying income tax on their earnings and currently stands at £12,500.
Despite being the key driver behind the controversial Eat Out to Help Out scheme last summer, there has been suggestion that Sunak could raise “sin taxes” on cigarettes and alcohol. The ill-fated scheme in the summer aimed to keep restaurants afloat but some have suggested it helped the virus spread during the summer months.
An increase in beer duty now could add additional pressure on the hospitality industry which has been ravaged by the pandemic. As such, the Chancellor will likely hold off for now.
UK Budget Preview: What can we expect?