INSIGHTS

Duncan Donald

Wed, Mar 11


UK Budget day – The UK shows a pragmatic, aligned approach to COVID pressure

It was a day where we expected it to be all about the new Chancellor, Rishi Sunak and his midday budget, where serious measures were promised to counteract the impending pressures of the coronavirus causing pressures on the UK’s public and businesses. The Bank of England, however, woke early and showed that the UK Government and the Central Bank are aligned in their actions to stimulate spending and the economy.

 

Whilst the market had been factoring in an impending rate cut from the Bank of England (BoE), the 7.00 move this morning, as the London market opened, brought an interest rate cut from 0.75% to 0.25%. This reduction by 0.5% came as a surprise to the markets, which had not discounted that possibility, but more reasonably expected 0.25%.

 

The general consensus was that the BoE and Government aligning of their approach to the stimulus was positive. Having the benefit of seeing the disjointed and almost antagonistic approach seen in the United States between the Central Bank and Government, their decision to act together was a wise one.  The knee jerk reaction was a move lower in the Pound, which is in line with the relationship between the currency and the interest rate, with GBPUSD hitting a low of around 1.2850. This was before bouncing back as speculators warmed to the fact that the UK was “tooling up” in the right way, at the right time.

 

After affirmative action from the BoE there was an expectation of delivery from the new Chancellor and in terms of pledges for stimulus he didn’t fail to deliver. The early feedback from media channels is that the additional spending as well as structured direct and deferred cost reductions offered to businesses will help, of course. With the UK being at the start of Coronavirus impacts, it simply can’t be gauged as a success or not, but the willingness to aid and support businesses and the public is evident.

 

One grey area so far, is at what cost will this come. As Sunak announced an aid package worth half a trillion pounds, of course, we have to look at how will that be offset. The only noticeable tax and cost increases were on non-residents buying properties via a 2% surcharge and an increase in medical care costs for the same demographic. These incomings won’t come close to cover the outgoings.

 

Another concern, was the lack of discussion regarding the impacts of Brexit, whilst the virus has pushed the situation off the headlines it’s a very real and uncertain time for the UK, how will we provision to fund the unknown variables it potentially brings.

 

However, in the short-term, this fiscal stimulus should help as the UK moves towards the eye of the coronavirus storm and we can only hope the pressure it brings can be absorbed by the cushion provided by the BoE and Government together.

 

Main points of Chancellor Sunak’s budget: 

  • Provision of £5 billion of emergency funds for the emergency services and NHS
  • Increase in non-UK resident medical care costs
  • Increase of National insurance threshold 
  • Sick pay provision for all who are self-isolating due to coronavirus from day one
  • Reduction of business rates for targeted businesses in the hospitality, retail and leisure sectors
  • Relief to small firms whois business who suffer virus-related disruption (loans up to £1.2bln available)
  • A freeze on beer, spirits and fuel prices
  • Increased spending in Research and Development
  • Immediate stimulus for those affected by the recent floods of £120m and increase of provision for flood resilience. 
  • Economy forecast to expand by 1.1% against an increase of inflation to 1.4% in 2020




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