RegionsEEAUK Budget shines light on “subdued” short term prospects

UK Budget shines light on "subdued" short term prospects

Economic impact of UK Government borrowing, per its recently announced Budget, will have a knock-on effect for treasurers

The UK Government’s Budget on March 11 outlined drastic spending measures as the Office for Budget Responsibility (OBR) downgraded both GDP growth and productivity predictions.

Per the OBR, the Government is on track to borrow roughly £60bn in 2023-24, which is an increase of £27bn on previous forecasts. The UK economy is also expected to grow by 1.1 percent this year, making it the slowest growth pace since the 2008 financial crisis.

“The debt-to-GDP ratio is twice as high as in the pre-crisis period, the stock of index-linked gilts is much larger and the Bank of England’s asset purchases have shorted the effective maturity of the public debt,” the OBR wrote on its website.

The organisation later noted that “public finances are more vulnerable to adverse inflation and interest rate surprises than they were.”

However, chancellor Rishi Sunak defended his Budget and told the House of Commons: “I am not going to make an apology for responding at scale in a comprehensive fashion to the immediate challenges we face from coronavirus. I do think that is the right thing to do.”

Chief economist at EY UK, Mark Gregory, commented via email that Sunak’s budget will provide short-term relief, but time will tell if his response is enough.

“Businesses are likely to conclude this is a holding budget and focus on getting through the short-term challenges while waiting for more detail on the flagship policies and the outcome of negotiations on the UK-EU trade deal,” Gregory said. “Business investment is likely to remain subdued for the immediate future.”

Sunak’s Budget also offers a long-term tax increase to the tune of £6bn per year which may help stem the growth of any underlying debt. However, as the Institute for Financial Services (IFS) noted at a Budget briefing on March 12, “Not all capital spending is good; not all current spending is bad.”

Corporate treasurers may be disheartened that the corporation tax rate will remain at 19 percent for both 2020 and 2021. By 2024-25, this is forecasted to raise £33bn.

At a more regional level, companies with a rateable value under £51k will not have to pay business rates in the coming year, which the Government says will offer a break to hundreds of thousands of businesses—particularly smaller ventures.

SMEs may also see relief through government-backed bank loans, but the Entrepreneurs’ Tax Relief cut will have a longer-term effect on these businesses, as the lifetime relief limit was scaled back from £10m to £1m.

“The bigger risks in the short term probably relate most to difficulties in spending the cash set aside for investment projects effectively, and in disappointing expectations on current spending,” the IFS said. “In the longer term, higher borrowing and debt carry their own risks.”

Large businesses, particularly those with international reach, did not receive much assistance from the Budget.

However, the IFS concluded that the Budget’s numbers will only have meaning “once the economic effects of coronavirus become fully evident.”

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