Rishi Sunak’s plan to rebuild the finances, but not quite yet!

In every downturn, the government’s finances will deteriorate, sometimes sharply. Tax receipts fall as job losses, bankruptcies and subdued spending impact the three big sources of revenue for the Treasury – income tax, National Insurance and VAT. On the debit side, government spending rises through unemployment benefits and welfare payments.


There is always a moment at the depths of a downturn when the budget deficit looks awful and the prospect of a return to more balanced books impossible. Wednesday’s budget statement was the epitome of this.


Not surprisingly this pandemic has had an even more profound impact than we usually see during downturn. Government measures to support the economy from complete collapse during extended lockdowns, has pushed their spending to levels unprecedented during peacetime. Roughly 75% of the increase in the budget deficit has arisen due to these support measures – about £200bn in all. This week’s commitment to extend support until September will only increase the scale of this spending. And it’s all funded through borrowing.


Whilst tax receipts have fallen during COVID, the reduction is less than might be expected, testimony to the success of the support package in stunting the rise in unemployment and bankruptcies so far. Tax receipts as a percentage of GDP have remained roughly in line with their long run average of 37% of GDP. Contrast this with Government spending, which has risen from its more usual level of 40% of GDP to 55% and rising.


Whilst interest rates are virtually zero, stretching the balance sheet might be perfectly legitimate, but if interest rates were to rise (more on this later), the interest burden on the borrowing becomes problematic. This explains the Chancellor’s desire to ‘level with the British people’ on the unsustainability of current levels of spending and borrowing and the need to rebuild public finances in the future.


Budgets are, by their very nature, a balancing act and this week’s was no exception. Few have been so keenly anticipated, and with very good reason. Rishi Sunak was faced with the dilemma of starting the process of raising revenues to repair the UK’s battered balance sheet but equally he had to tread carefully to avoid choking off economic recovery before we had even rejoiced at seeing any green shoots. His tone was one of recognition that some tough decisions would need to be made, but that the economy is simply too fragile to withstand this at present, meaning most of the pain would be felt further along the recovery path.


As expected, and with very little alternative, he extended emergency tax cuts to help the British economy recover from the coronavirus but warned he would ask profitable businesses to help pick up some of the tab for the U.K.’s pandemic support. With the country still in the (hopefully) final throes of lockdown, the Chancellor made it clear that safeguarding jobs remains his priority in the short term, adding another £65 billion of financial support to help the country recover this year and next.


Integral to maintaining life-support for the economy he extended the stamp duty concession on property purchases for a further 3 months, a move widely expected, before this tapers down to the pre-crisis level at the end of September. The residential property market has been especially buoyant during the COVID crisis and the Chancellor, rightly in our opinion, does not want to whip away the punchbowl until there are more signs of life in the wider economy.


But in recognising the enormity of the deficit which has been racked up, he sketched out a plan to start plugging the gap, with an increase in corporation tax to 25% from the current 19% though this does not apply to the vast majority of businesses and even where it does, it kicks in from 2023. He said ‘The government is providing businesses with over £100 billion of support to get through this pandemic, so it is fair and necessary to ask them to contribute to our recovery’. He added ‘Even after this change, the U.K. will still have the lowest corporation tax rate in the G-7’. Whilst this may be true, there is no doubting the steepness of this rise and we would have expected to see more of a taper.


But it is not just businesses that will foot the bill. The decision to maintain income tax, National Insurance and VAT at their current levels should come as a welcome relief to consumer confidence and household budgets in the short term, but there was an inevitable sting in the tale. With tax allowances including the lifetime allowance, being frozen from next year until 2026, known as fiscal drag, this effectively increases the amount of tax consumers and savers pay over time. We see this as the only credible solution to not jeopardising the near term recovery for an immediate tax-grab, but stealthily tackling the conundrum of driving up tax revenues in the future.


Below is a summary of the key changes outlined:


Support schemes

  • With the furlough scheme, employees will continue to receive 80% of their wages until the scheme ends, but firms will be asked to contribute 10% in July and 20% in August and September as the scheme is gradually phased out
  • Mr Sunak also confirmed the self-employment income support scheme has been extended. The fourth grant will cover February to April, worth 80% of average trading profits up to £7,500
  • The £20-a-week increase in universal credit is extended for six months
  • The chancellor confirmed the £5bn restart grant for businesses to help companies get going after lockdown
  • As the government-backed bounce back loan (BBL) and coronavirus business interruption loan scheme (CBILS) come to an end, the Treasury is launching a new loan scheme to run until the end of the year. Loans can be between £25,000 and £10m
  • Hospitality and leisure businesses pay no business rates for three months, then rates will be discounted for the remaining nine months of the year by two-thirds, in a £6bn tax cut
  • The 5% reduced rate of VAT will be extended until the end of September. It will then be gradually increased, at 12.5% for six months, before returning to the standard rate from April 2022



  • Mr Sunak announced the stamp duty holiday will be extended. The widely leaked concession on properties up to £500,000 continues until the end of June. It will be kept at double its standard level until the end of September, and then return to its normal threshold of £125,000 from 1 October
  • The chancellor confirmed a mortgage guarantee to help first-time buyers access 95% mortgages, also widely expected


Taxation and duties

  • The government will not raise national insurance, income tax or VAT, but will freeze personal tax thresholds
  • The personal allowance will remain at £12,750 until 2026. The higher-rate threshold will increase to £50,270 next year, but then also remain at that level until 2026
  • The inheritance tax threshold, pensions lifetime allowance, annual exempt allowance from capital gains tax and VAT exemption threshold will also be frozen
  • Alcohol duties will be frozen for the second year in a row, as will fuel duty


Company taxation

  • In April 2023, the rate of corporation tax will increase to 25%. Mr Sunak said businesses will only be impacted if they are making profits, and the change will only come in once the OBR forecasts the economy will be in recovery mode
  • The rate will be tapered so that only businesses with profits of more than £250,000 will be taxed at the full 25% rate, meaning only 10% of companies will pay the full higher rate according to the Chancellor. Companies with profits of less than £50,000 will remain at 19%
  • The government is investing £25bn by allowing a 130% ‘super-deduction’ on tax for investments made by companies. This means firms can cut their taxes by up to 25p for every pound they invest according to the treasury calculations


Levelling up

  • The chancellor confirmed the Treasury will establish an economic campus in Darlington, alongside the business, international trade, and housing and communities departments among others
  • Freeports which are special economic zones with different rules to make it easier and cheaper to do business, will be launched. They will include infrastructure planning, customs and favourable duties and taxes. Mr Sunak announced eight locations in England: East Midlands airport, Felixstowe and Harwich, Humber, Liverpool city region, Plymouth, Solent, Thames and Teesside


Financial markets had generally priced in the announcement, since several of the measures had been leaked. The pound barely changed but the equity market reaction was generally positive with the FTSE100 ending the day up 1%. It was no real surprise to see rising share prices among those businesses that should be beneficiaries of further support to the domestic economy, such as banks and leisure stocks, alongside housebuilders, with the latter getting a boost from the extension of the stamp duty holiday and mortgage guarantee programme.


Rising too was the yield on government bonds. Whilst this might sound positive, it isn’t because when the yield rises, bond prices fall. This move continued the trend seen for much of this year. Bond markets are anticipating economic recovery, which brings with it the threat of inflation and ultimately higher interest rates and Mr Sunak’s comments on Wednesday did little to convince investors otherwise. This remains one of the key reasons we have been underweight bonds across all CDC portfolios and tactically we still favour stocks over bonds.


As always, if you have any questions about this, or need more information, please feel free to contact your adviser, who will be happy to help.


Dr Andrew Mann
Investment Director