Budget reaction: ‘missed opportunity, drop in ocean’

Rishi Sunak

Aberdeen Standard Investments chief economist Jeremy Lawson has outlined what he called the “missed opportunities” of the UK budget.

Lawson said the £40 billion worth of green infrastructure the government expects to catalyse is “a drop in the ocean compared with the country’s long-term green infrastructure needs.”

He said the UK government needs to put in place a “stronger framework” to evaluate the climate impacts of all its investment decisions.

And he said the decision to freeze fuel duty rates, while understandable against the current economic backdrop, “represents an unnecessary implicit subsidy for the usage of fossil fuels.”

Lawson said: “Today’s UK budget provided welcome additional detail about how the government plans to meet its long-term climate and environmental commitments.

“The announcement of the new infrastructure bank will help mobilise more capital for green investment projects.

“The new green retail savings product will help energise wider public participation in and support for the zero carbon energy transition.

“And the expansion of the Bank of England’s remit to formally support net zero objectives will ensure that monetary policy decisions are working in lock-step with the government’s agenda.

“Taken together, these will reinforce the UK’s credentials as a global leader in the race to limit further damaging climate change.

“However, we think there were also some missed opportunities.

“The £40bn worth of green infrastructure the government expects to catalyse is a drop in the ocean compared with the country’s long-term green infrastructure needs.

“We also think that the government needs to put in place a stronger framework to evaluate the climate impacts of all its investment decisions, as well as broader policy initiatives, ensuring that each decision is compatible with its net zero commitments.

“Meanwhile, the decision to freeze fuel duty rates, while understandable against the current economic backdrop, represents an unnecessary implicit subsidy for the usage of fossil fuels.”

Isabelle Jenkins, leader of financial services at PwC UK, said: “The Chancellor’s announcement today that the UK corporation tax rate will increase from 19% to 25% from April 2023 had been trailed in recent days, even if the single increase was unexpected.

“With this in mind, the banking sector was watching closely to see whether the Government would recognise the potential detrimental impact such a move would have on international competitiveness for banks operating in the UK if the 8% banking surcharge currently in place is retained alongside this increase in the headline rate.

“The sector will therefore welcome the recognition of this issue by the Chancellor in his speech and the clear indication that the Government considers the overall tax rate for banks will be too high if there is no action taken.

“We await the outcome and proposals of the Government review which is expected to be announced in the Autumn.

“Today’s announcement is made against a backdrop where the competitiveness of the UK for banks is under considerable pressure.

“A recent PwC survey looked at the tax burden for the banking sector in an international context and showed that, on a comparative basis, the effective tax rate for a model wholesale banking activity, taking into account both taxes borne and collected, was already some 13% higher in the UK than in New York.

“The banking sector will be hugely important to credit creation in the coming months in generating growth as the UK economy starts to recover from the pandemic.

“The Government’s clear recognition of the need to review the bank surcharge is therefore to be welcomed.”

Simon Harrington, senior public policy adviser at the Personal Investment Management & Financial Advice Association (PIMFA), said: “We are dumbfounded that the Chancellor has frozen the Pension Lifetime Allowance until 2026.

“Doing so penalises pension savers looking to secure their future and in the most extreme cases sees people left with no choice but to give up work.

“Freezing the lifetime allowance could see a number of people inadvertently exceed their allowance and, as we have seen previously with NHS workers, incur a 55% tax hit which they otherwise would not have to pay.

“Freezing both the Inheritance Tax and Capital Gains Tax also discourages the public from investing in our economy at a time when the Chancellor himself admits we need an investment-led recovery.

“Whilst we strongly believe that there should be focus on repairing public finances, freezing the thresholds for Inheritance Tax, Capital Gains Tax and the Lifetime Allowance attacks individual personal finances and aspiration.

“Covid has shown how fragile the UK’s consumption driven economy can be.

“We need to become a more resilient and investment driven country.

“This cannot be achieved without the savers and investors that would be most hit by these changes.”

Deloitte chief economist Ian Stewart said: “More than £50 billion of extra help for businesses and households in the next year will give the economic recovery a shot in the arm.

“With the end of the lockdown in sight, the UK will see a strong rebound, with investment playing an outsize roll.

“Even once the pandemic support schemes wind down, the public sector will be larger than it was before the crisis.

“To reverse the rise in the burden of public debt by the end of the parliament the government has pencilled in a rising take from business and income taxes from next spring.

“Paying down the public debt accumulated in the pandemic is likely to be the work of several governments.

“But the Chancellor is planning for beyond the pandemic, and the fiscal tightening that will be needed to begin to reduce levels of government debt.”

Finance and economy expert Zeeshan Syed, from the University of Salford Business School, said there was a glaring omission in the budget — no mention of productivity.

Syed said: “This budget needed to be the most impactful since WWII because it had to lay out the plan for restarting growth and competing with the EU, a new competitor.

“Rishi tries to address both challenges by announcing policies such as more funding for existing businesses, ease of access to grants, the extension of the furlough scheme, incentives to recruit more people, and investment in Fintech.

“These interventions are needed, but two things that matter most seem to be under-addressed.

“One is that it does not provide a way forward for long-term stability, and second, it does not admit enough that we are the second-lowest nation in terms of productivity among G7.

“For the first, the Chancellor postponed the corporate tax raise to 2023, and it will delay firms’ relocation and protect jobs.

“But come 2023, firms may consider relocating to Ireland or elsewhere again, where companies can have the best of all worlds.

“Further, if we want savers and consumers to spend their money, then we need to give them the confidence about their jobs now, not in 2023.

“The latter requires incentivising adults to retrain, relearn, and redevelop their skills.

“The Chancellor wishes to handle this with another scheme, but his first Kickstart scheme could not do the job.

“A better solution could be to entrust universities to train our young and adults and lead the nation out of the low productivity crisis.

“Let’s hope he has another plan.”

Paddy Graham, head of BGF in Central Scotland, commented on how the UK Spring Budget impacts business growth in Scotland.

Graham said: “With public finances in a precarious position, following the unprecedented levels of borrowing to support the economy through the pandemic crisis, this budget was always going to be a challenging balancing act.

“In recognising this, the additional funding to support high growth sectors such as technology through the Future Fund: Breakthrough along with investment and measures to encourage economic recovery and growth, will be welcomed.

“Through the first of its kind 130% Super Deduction, from April companies will be able to cut their taxes by up to 25p for every pound they invest over the next two years.

“This reinforces what the business community has been calling for, for the government to focus on an investment-led recovery and will provide a strong incentive for businesses to invest which will in turn, help to kick start the economy.

“Whilst the deferral of the corporation tax rises to 2023 are welcome, the increase to 25% will be a blow to businesses in Scotland, given the severity of the disruption they continue to face following the pandemic.

“The Chancellor’s decision to freeze CGT until 2026 will be welcome, however businesses owners and entrepreneurs will be impacted by the removal of the inflationary benefit.

“This may encourage some to push through any planned mergers or acquisitions before the impact of the freeze is fully felt.”

Jim Higgins, Tax Director at Deloitte in Scotland, commented on changes to the self-employment income support scheme (SEISS): “The Chancellor has confirmed a fourth SEISS grant to cover the period from 29 January to the end of April, followed by a fifth grant from May onwards.

“Together these are forecast to cost over £11 billion, bringing the total cost of the scheme to over £30 billion.

“In order to be eligible for either of the grants, the individual’s 2019/20 tax return must have been filed by midnight on 2 March 2021.

“For eligible individuals, the fourth grant is equivalent to 80% of three months’ average profits, capped at £7,500.

“The tax years used for averaging can vary depending on when trading commenced and whether the individual is subject to special rules for parental leave or military reservists.

“Additionally, about 600,000 individuals who became self-employed during 2019/20 may now qualify for the grant if they meet the eligibility criteria for that year.

“The fifth grant will work in a similar way to the fourth, but the amount of the grant will depend on the extent to which turnover has been affected.

“Those whose turnover has dropped by 30% or more should be entitled to the full 80% subject to the £7,500 cap.

“If the drop is smaller, the grant is at 30% with a cap of £2,850.

“Unlike the previous grants, the average profits used in the calculation will generally be based on the 2019/20 profits rather than the preceding three tax years, provided profits were £50,000 or less but at least as much as non-trading income.

“This may be better or worse than the previous approach, depending on how 2019/20 compares with the preceding three years.

“If the individual does not meet the income criteria in 2019/20 in isolation (e.g. profits exceeded £50,000), but did meet the criteria for the previous grants, the previous criteria can be used.

“Some of those who were newly self-employed during 2019/20 may still fall outside the net due to the requirement for trading profits to make up at least half of their income.

“Income is considered for the tax year as a whole, so employment or other income received before they started trading could prevent them from meeting the income criteria.”

Dr Gordon Fletcher, retail expert, University of Salford, said: “The Chancellor’s budget offered a predictable and even inevitable response to the cost of the pandemic.

“However, within the details some surprising initiatives emerged.

“The Community Ownership Fund offers the prospect of local groups ‘buying the pub’ or sport clubs.

“This opportunity picks up the growing sense of the local that has emerged during the past year and may provide a lifeline to some of the social venues that have suffered the most.

“Of course enabling community ownership of these venues may also represent the failure of a previously successful business.

“The £4.8bn Levelling Up fund is the other opportunity on the table for high streets.

“The focus is on big infrastructure projects such as buying brownfield as well as supporting cultural institutions including local museums.

“The challenge will be to get proposed projects lined up with the economic need in each locality.

“As is often the case with budget announcements, the prospect of success for these funding initiatives and these projects will come down to the details.

“Not least the choice of which project each MP will decide to support.” 

Steven Cameron, pensions director at Aegon, said: “The devastating impact the pandemic has had on our most elderly has shown just how valuable but stretched our care system is, making it even more urgent that the government delivers on previously promised reforms to social care funding for our ageing population.

“With that in mind, the silence on social care funding proposals in the Budget was deeply disappointing, leaving us no further forward on how or when social care funding will be tackled.

“Undoubtedly, the havoc COVID-19 has wrought on the nation’s finances has made finding a sustainable solution harder than ever.

“Previous suggestions to create sustainable funding included an increase in income tax or national insurance, earmarked for social care, and perhaps just for the over 40s, but these now need considered against wider Government tax and spending policy.

“We welcome how the chancellor is levelling with the public on the financial impact of COVID-19, but that honesty urgently needs to be extended to cover how to meet the future costs, to both the state and individuals, of social care.

“The Government needs to urgently set out a fair and sustainable system, ideally with cross party support, detailing what the Government will pay and what individuals will be asked to fund themselves, based on their housing and other wealth.

“Individuals then need incentivised to plan ahead.

“In our view a cap on what individuals are required to pay is essential here to avoid fear that ‘catastrophic’ care costs will wipe out their life savings and inheritance aspirations.

“With social care increasingly needed in later retirement, defined contribution pensions offer a ready-made funding solution.”

Dr Jonathan Owens, logistics and infrastructure expert, University of Salford, said: “It is encouraging that the budget provided further direction on net zero emissions to try to maintain pace with the 2030 deadline for the cessation of traditional fuel vehicle sales and moving to the sales of electric and hybrid vehicles only after this date.

“This was provided by the Treasury reforming the Bank of England’s mandate to include targeting net zero emissions, this was on top of the existing 2% inflation target.

“While green announcements are an expectation in budgets, because of the current pandemic today’s announcement is relatively modest.

“Despite the Transport Secretary recently suggesting the UK’s charging infrastructure is ‘World Leading’ the rollout of electric vehicle charging points has fallen behind what is needed for the 2030 as claimed by a recent Policy Exchange think-tank.

“The UK will need 400,000 public chargers by 2030, up from 35,000 currently to reduce the risk of ‘charging blackspots.’

“Therefore, this was perhaps an opportunity missed for a post-COVID-19 green infrastructure revolution to support the UK’s road to net zero.”

Naomi Jacques, associate in the pensions team at law firm Womble Bond Dickinson, said:

“In today’s Budget, the Chancellor has announced that the lifetime allowance (LTA) for pension savings is being frozen at its current level of £1,073,100 until April 2026.

“This marks a change from recent years, when the LTA has increased in line with inflation since it was re-set to £1m in 2016/17.

“For individuals with relatively high levels of pension savings (but certainly not restricted to the richest members of society) this will increase the likelihood of exceeding the LTA when they come to retirement.

“Any pension benefits above the LTA limit will attract an additional tax charge (of 25% on pension payments or 55% on lump sum payments) over and above the income tax which generally applies to pension benefits.

“The freeze will initially only affect those whose pension savings are already close to or above the LTA, but an increasing number of people will be impacted as time goes on.

“The change may encourage higher-earning individuals (and their employers) to consider whether their current pension saving arrangements are still appropriate.

“More generally, however, this should not be seen as a reason to stop contributing to a pension – for many people the LTA will not be a relevant consideration, and even for those whose savings may exceed the LTA there can still be benefits to continuing to contribute.

“Individuals who currently benefit from LTA protections (which allow them to retain historic, higher LTA levels) will be unaffected by the freeze.

“The Budget also contains a promise to consult within the next month on whether the charge cap (which applies to default arrangements in pension schemes used for automatic enrolment) affects the ability of pension schemes to invest in a broader range of assets and thereby offer the highest possible returns for pension savers.

“The DWP will publish draft regulations which will address this issue, including by permitting the smoothing of certain performance fees over a multi-year period.”

Hinesh Patel, portfolio manager at Quilter Investors, said: “With billions being dished out left, right and centre, Sunak once again gives the appearance of being a big spender, but he really has no choice.

“We remain in the grips of a global pandemic that has shaken the core of our daily lives, and it is only big spending that will be the bridge to help get us through.

“The Treasury is still very much in crisis mode, and while unemployment remains stable without the furlough scheme it would be above 10%.

“It is essential that the economic re-opening goes as smoothly as possible, and the ‘temporary’ furlough scheme doesn’t lead to any permanent scarring.

“For this reason, the further employment support and targeted investment policies are extremely welcome.

“With the Bank of England and the Treasury operating hand in hand and interest rates remaining at historic lows, there is no reason to worry about the debt load for now.

“But the Chancellor is right to manage expectations and give a clear warning to the public and backbench Tory MPs that after the economy has re-opened, the additional spending will need to be funded through fiscal rather than monetary means.

“Tax hikes are on the horizon, most notably for businesses with a big jump in corporation tax to 25% in 2023/24, but with a useful tapering feature and with a super-deduction on investments that could reduce certain companies’ tax bills by 130%.

“Overall, the Chancellors aim is to spend now, and increase the tax take through inflation during the recovery, and then build back the economy through business investment tomorrow.

“For investors, the OBR’s latest fiscal forecast confirms what we can already see playing out.

“The UK vaccine rollout is progressing beyond expectations, and with a full reopening pencilled in for 21 June, we should see solid growth in the second half of the year.

“This suggests we could see outperformance for UK small and mid-caps, as well as the companies that have taken a battering as a result of the lockdowns.

“However, investors should not lose sight of the huge secular changes in the global economy and many areas having ‘priced-in’ future optimism already.”

Kevin Brown, savings specialist at Scottish Friendly, said: “Rishi Sunak has today reaffirmed his commitment to helping UK households and businesses in the coming months by continuing to print more money to support the government’s stimulus packages.

“During 2020, the money supply in the UK skyrocketed and Bank of England data shows that as of November, households were sitting on £1.6 trillion – a £120 billion increase from February.

“Until now, this increased money supply has not impacted on prices as a lot of the extra cash has been sitting idly in bank accounts.

“But with restrictions beginning to ease from March and the government doing its best to spur economic activity, the dam that has been holding inflation back could soon be about to burst.

“If interest rates are kept low, there is a real risk that inflation could rise rapidly above the Bank of England’s 2% target and be difficult to control.

“If this is allowed to happen, then it will be UK households who bear the brunt of its force.

“Anyone who has money with a bank or building society, could see the real value of their savings eroded in a relatively short space of time.

“The inflationary alarm bells are ringing and households should be considering where they might find safer ground, for example in real assets such as commodities and equities.”

Paul Fazackerley, IFA at Furnley House, said: “While not everyone will support raising the rate of corporation tax, the reality is that it’s the right thing to do.

“Corporation tax is a tax on profits, not turnover, so it is only a tax on businesses that are thriving.

“Businesses have had a lot of support over the last year and there have been more winners than perhaps some people realise.

“Even after the raise, the UK’s rate of tax cannot be considered high on a global scale, and this change is also one of the simplest to implement, so avoids creating confusion or uncertainty elsewhere.

“The worst thing we could have had was more changes to pensions or savings legislation, particularly with so many people having to adjust their retirement plans due to the pandemic.

“So a tax that puts more burden on successful businesses without impacting ordinary savers or retirees makes a lot of sense.”

Jason Cozens, founder & CEO of Glint Pay Services, a fintech company that uses gold as an alternative global currency, said: “The government’s stratospheric borrowing throughout the pandemic hasn’t just proven to be the death of cash; it’s nailed the coffin lid firmly shut.

“Over £400bn has been borrowed to get through the pandemic; this needs to be repaid sooner or later and once again the financial impact is likely to be unequal across society.

“An increase in borrowing and national debt will only further devalue cash and our savings.

“Historically low interest rates, which may yet fall into negative territory, rising inflation and borrowing that has spiralled out of control have all punished consumers and savers in recent years.

“Unfortunately, the worst is yet to come.

“It’s no wonder that more consumers, savers and private investors are flocking to alternative currencies and turning their backs on traditional financial institutions.

“Government-backed currencies have proven to be unreliable stores of value, so consumers are searching for an alternative currency that is less prone to losing its purchasing power over time.”

About the Author

Mark McSherry
Dalriada Media LLC sites are edited by veteran news journalist Mark McSherry, a former staff editor and reporter with Reuters, Bloomberg and major newspapers including the South China Morning Post, London's Sunday Times and The Scotsman. McSherry's journalism has also appeared in The Washington Post, The Guardian, The Independent, The New York Times, London's Evening Standard and Forbes. McSherry is also a professor of journalism and communication arts in universities and colleges in New York City. Scottish-born McSherry has an MBA from the University of Edinburgh and a Certificate in Global Affairs from New York University.