2021 Budget: all eyes on the recovery

By Mike Weston, CEO, LGPS Central Limited

This year’s budget has been one of the most anticipated in recent memory, and with good reason.

Covid-19 has created a huge shock to the economic system and following the unprecedented level of fiscal spending from the UK Government to cope with that shock, attention now turns to… what next?

The populist headlines have by now been widely shared on mainstream and social media – and after a year of lockdown, no increase in beer duty when the pubs finally reopen is most certainly welcome!

Mike Weston

Analysts will currently be poring over the small print of the full budget document, but here are my initial thoughts following the Chancellor’s speech.

Pensions and savings

From an institutional pension scheme investment manager’s perspective, I was paying close attention for any significant new announcements on pensions or savings taxes, but I didn’t hear any.

Hopefully, given the recent Pension Schemes Act, we’ve had all the changes already and there will be nothing hidden away in the detailed budget paperwork. Funding for social care remains an unanswered question though.

Impact on investors

As far as investment markets are concerned, the particular announcements which caught my eye were:

  • overall economic growth and debt forecasts
  • the new UK Infrastructure Bank in Leeds, and
  • government guaranteed 95% mortgages for house-buyers.

I think we all appreciated the sheer scale of the Government debt taken on to fight covid-19, but yesterday we had it spelled out: “It will be the work of decades to pay back what we have borrowed.”

Repayment will be helped by a recovery in UK economic growth. A peak of 7.3% growth in 2022, which will then slow back down, will restart consistent expansion. But it will still leave us 3% behind where we would have been without covid-19 by 2026.

Growth is good for equities, and at this level it is unlikely to raise too many fears of runaway inflation, which should also support gilts (once the fixed income market has digested the Government announcement to sell c.£295bn of bonds next fiscal year – above the median estimate of £249.5bn).

Speaking of gilts, the Government will debut its first green gilt later this year in an effort to boost its sustainable investments. But the budget freeze in fuel duty could be interpreted as a move counter to the declared climate agenda.

Equity markets are likely to look through the corporation tax rise, and certainly at the upper end of the market where profits generated by UK quoted companies often do not arise in the UK anyway.

£12bn of capital for a UK Infrastructure Bank doesn’t buy much infrastructure these days so the new bank’s interaction with providers of private capital, such as pension funds, will be important, as will the sectors it focusses on in addition to the eight new freeports the Chancellor identified this week. The consultation on allowing Defined Contribution pension assets to be invested in illiquid assets is reminiscent of George Osborne’s previous attempts to use UK Defined Benefit and LGPS pensions savings to fund the country’s infrastructure upgrade.

House price growth is likely to receive another step-up as buyers will be able to access 95% government guaranteed mortgages; one way to introduce an economic feel good factor to offset our decades of covid-19 debt paydown.

A long way to go

Despite the increased budget deficit, a huge amount of money is still being promised to ailing businesses. Building confidence and creating jobs is of higher urgency than paying back our debts.

That will eventually happen, of course, but the economy has to be in rude enough health to cope with the treatment.   

The Chancellor has made a start to resetting the fiscal balance but there is clearly still a long way further to go – and this all assumes, as we would all hope, that the worst of the covid-19 pandemic is now behind us.

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