Chancellor Rishi Sunak’s Budget delivered a set of measures to boost optimism and confidence against a backdrop of improving public finances. Ross Walker and Theo Chapsalis share their perspectives.
With the furlough scheme having only just been wound down and supply chains still tangled amidst the post-pandemic revival, markets and observers fairly saw the Autumn Budget 2021 as a critical balancing act between restoring fiscal discipline after record peacetime spending, on the one hand, and maintaining steady levels of support and investment in a still recovering economy on the other.
Striking that balance was aided by better-than-expected near-term growth and higher inflation. Both have boosted government’s tax haul and significantly reduced its reliance on borrowing, allowing the Chancellor to loosen the purse strings more than most expected (us included).
Better, Faster, Stronger – but also Harder
But risks still loom. As we flagged in our Autumn Budget preview, near- term economic growth is indeed better-than-expected; but from next year, it is likely to retreat more than initially thought. Stronger public finances and quicker deficit reduction shouldn’t be mistaken for aggressive fiscal tightening. In fact, the new policy measures contained in the Autumn Budget equate to roughly 1% of gross domestic product (GDP) in 2022-23 and 0.8% of GDP the year after. But this will almost certainly make it harder for the Bank of England (BoE) to resist tightening monetary policy, which will raise the cost of borrowing. Meanwhile, the tax burden will continue to rise; by 2026, it will climb to its highest level since the early 1950s.
Read on for our top 5 takeaways from the Autumn Budget 2021.
1. Public finances are back on track
The Office for Budget Responsibility (OBR) said the economy would bounce back to its pre-pandemic size six months earlier than previously predicted. A large upward revision in growth expectations for this year (6.5% GDP growth, from 4% in March), higher inflation and reduced economic scarring from the pandemic (2% of GDP, from 3% in March) have left public finances in much better shape than previously anticipated. The deficit is also expected to fall relatively quickly, and the government now expects to run surpluses (equal to roughly 1% of GDP) from 2024-25 onward.
2. Government support remains accommodative, particularly for those hardest hit by the pandemic
Key policy measures in the Autumn Budget look sizeable and should help those hardest hit by the pandemic: reducing the taper rate of Universal Credit (£2.2 billion in 2022-23) which will undoubtedly help lower-income families; fuel & alcohol duty freezes that will benefit UK producers, pubs, and bars (roughly £2 billion), and business rates relief for hospitality, retail, and leisure companies (£2.7 billion). All told, the Autumn Budget includes some £23.5 billion in new stimulus measures, certainly more than we had expected.
3. Foreign investment for “Global Britain” to ease labour, talent shortages
The government announced a new £1.4 billion Global Britain Investment Fund to encourage foreign investment and attract overseas talent into the UK. The Fund is expected to spur investment in innovative technology-driven sectors across the UK, for instance helping to facilitate the production of electric vehicles in regions such as the North East and the Midlands.
There will be easier visas and extra funds to attract migrant workers with science and tech skills amid the UK’s growing labour shortages.
4. Wages up for low-paid workers, higher costs for employers
The National Living Wage (NLW) – the minimum wage for those aged 23 and over – will rise on 1 April 2021 by 6.6% to £9.50 an hour. The 59p rise was backed by the Low Pay Commission and means an annual wage of £19,760 for a 40-hour week. The other new minimum wage brackets are £9.18 an hour (ages 21-22), up from £8.36; £6.83 (ages 18-20), up from £6.56; and £4.81 (under-18s and apprentices), up from £4.30.
Some 2.2 million workers, about half of them in retail, hospitality, or cleaning, will be boosted by this increase. But these minimum wage rises come at a time when firms are already facing significant cost pressures (notably energy, transportation) and risk compressing profit margins and fuelling inflation.
5. Vastly reduced need for government borrowing means the gilt tap will be shut
The spending measures introduced in the latest Budget were more generous than we expected, but government borrowing is actually set for a steeper drop than previously thought. The Central Government Net Cash Requirement (CGNCR) – the borrowing aggregate which forms the basis for gilt issuance – is expected to drop to £157.6 billion in 2021-22, well below the £240.4 billion estimate from the revised remit in April. It will then fall even lower (to £107.9 billion) the following year.
An obvious consequence of this is a sharp decrease in gilt sales. The Debt Management Office (DMO) plans to slash gilt sales by nearly £59 billion this year to ensure the market continues to function smoothly. But less gilt issuance overall should make the asset class more attractive. And as expected, greater certainty over public finances and a less influential pandemic have reduced the government’s reliance on shorter-dated borrowing relative to longer-term debt.