Mini-Budget 2020: Benefits and Risks for the UK Economy

Photo by Scott Graham on Unsplash

This week’s blog looks at the newest round of measures taken by the government to try to mitigate the economic damage caused by the Covid-19 pandemic. Around £125bn in stimulus has already been deployed, significantly boosting the UK’s national debt but providing much-needed funding in select areas of the macro-economy.

The Mini-Budget in Short

On Wednesday, Chancellor of the Exchequer Rishi Sunak unveiled the latest round of measures designed to stimulate economic activity and reduce shocks to industry and the labour market. The package, worth £30bn, is keenly focused on a number of specific areas, ultimately showing where the government thinks the most impact can and should be made. For Hospitality and Tourism, Sunak announced a cut in VAT from 20% to 5%, at an estimated cost of £4bn – this will likely come as a particular relief to an industry that has been hit especially hard by lock-down measures.

In a potential boost to youth employment prospects, the government will deploy £2bn in a scheme to encourage the provision of employment and apprenticeships for those between the ages of 16-24 who are currently on universal credit. This applies to placements lasting six months and covers 25 hours’ worth of work per week at minimum wage.

Sunak also confirmed the end of the furlough scheme by October, however this was accompanied by the announcement of the ‘Jobs Retention Bonus’, which promises a £1000 payment to employers for each worker brought off furlough. The scheme is designed to cover up 9.3 million workers, which could therefore cost up to £9.3bn. Nonetheless, this cost dwarfs in comparison to the cost of the scheme as a whole, slated to cost the treasury around £80bn by the October end date.

What About UK Property?

Given the stark YOY fall in market transactions (estimated at about 50%), as well as four consecutive months of falling house prices, the government has opted to try to reinvigorate the property industry with an increase of the stamp duty threshold to £500,000. This represents a marked change from the past, which saw a threshold of £125,000 or £300,000 for first-time buyers. While this has been hailed by many as a bold move to support the property market, it isn’t coming cheap, given that the treasury takes in an estimated £12bn in stamp duty every year. Given that the cut is due to last 9 months, it is hoped that those who had put their plans to buy property aside will now find themselves reconsidering now there is the obvious incentive to do so in the immediate term.

Are Policy-Based Risks Building?

There is a degree of triage that the government has to undertake when deciding where and when to spend money. The national debt is already around twice the level it was at the peak of the financial crisis in 2008, and the ‘fiscal hawks’ in the government will be urging restraint from any further significant borrowing. There is significant risk that a lot of this spending could be in vain if the UK was to see a severe ‘second wave’ which necessitated another nationwide lockdown, so it is key that this spending is accompanied by a responsible reopening of the economy.

Moreover, as we discussed previously, household saving has increased dramatically in the face of a deep recession. On the monetary policy front, this puts the Bank of England in a precarious position with regard to interest rates. The need to stimulate demand is clear, which would be primarily targeted through a further cut in interest rates from 0.1%. However, this is in danger of supercharging inflation if people are waiting until the reopening of the economy to start spending again. Ultimately, this depends on the type of recovery that plays out, given that the government is likely betting on a rapid ‘v-shaped’ return to positive growth.

Our View from Canary Wharf

Here at Yielders, we applaud many of the measures the government has taken to boost the economy and protect people where possible from the unprecedented shock caused by Covid-19. We are looking at the stamp duty cut with great interest, and we are looking to see how we can utilise the opportunity to bring investors further competitive and sustainable opportunities. Finally, we are pleased to see the office slowly filling up, with appropriate measures in place to allow physical distancing.

Check-in next week for a discussion of the latest UK property market data, as well as an in-depth look at demand for suburban and green-belt property.

Yielders does not provide any advice in relation to investments and you must rely on your own due diligence before investing. Investments in property and unlisted shares carry risk and you may not receive the anticipated returns and your capital may be at risk.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s