Budget 2021: the knowns and unknowns

The run-up to the Budget has featured the usual wave of speculation, special pleading and kite-flying.

This month, a group of Conservative MPs from the northern Red Wall — ex-Labour seats that turned Tory at the last election — called for council tax and stamp duty to be scrapped and replaced with a single new property tax. It would, naturally, lead to lower taxes in the north and higher levies in London and the Southeast. So their voters would be happy and the MPs would improve their chances of retaining their majorities at the next election.

It won’t happen. There is no way that Boris Johnson’s Tories will hit their political friends and relations in the Home Counties so hard. And if they did, there’s not much you could do about it now in the few days before chancellor Rishi Sunak stands up in Parliament. You can’t realistically sell your house so fast. Or even, for the fortunate, one of your houses.

So, as we prepare for the Budget, let’s focus first on what we already know. In particular, consider the financial implications of this week’s big announcement — Johnson’s lockdown exit plan. Not only is it important in itself, in setting the framework for how we will live, work and play, it also defines the parameters of what the chancellor is likely to do on Wednesday.

The prime minister was, for once, deliberately cautious, presenting a provisional timetable stretching until mid-June. But even so, people pounced on the news to make plans to enjoy the anticipated freedoms.

Particularly striking was the rush to book holidays, including foreign holidays, for which the rules remain unclear. Stock market investors responded by bumping up the shares of travel companies, with easyJet soaring by 11 per cent at the opening on Tuesday, the day after Johnson’s speech, British Airways owner IAG by 8 per cent and tour operator Tui by 6 per cent.

While travel stocks later eased back, this is more than a temporary bout of enthusiasm. It’s a sign of the willingness of households with good jobs and solid bank accounts to go out and spend money — and, for some, to invest.

Behind the excitement lies the £125bn in extra savings that has been accumulated during the pandemic. Andrew Bailey, Bank of England governor, has said that this cash pile is likely to keep growing in the first half of 2021 and that it could be spent faster than expected when post-lockdown recovery finally comes. That is, as he says, “an upside risk”.

But on the other side of Britain’s economic divide, poorer householders are struggling, with job losses, pay reductions and mounting debts. This week, the latest data showed unemployment at about 1.7m — or 5.1 per cent, the highest figure in five years. The figure would be much higher without the government’s furlough scheme now covering an estimated 6.4m jobs.

Sunak will now try to chart a course that follows Johnson’s exit plan and supports the vulnerable, without stifling prospects for recovery highlighted by the holiday bookings charge.

In particular, he is expected to postpone at least until the autumn any serious attempt to raise taxes to reduce the deficits accumulated during the pandemic. Public borrowing is likely to hit £400bn for the financial year to April 5, up from just £55bn forecast in the Budget last March. Citigroup economists predict that even with a successful vaccination programme and a reasonable economic recovery, borrowing could still be £130bn in four years.

Fortunately, Sunak can afford to wait, at least for a few months. Near-zero interest rates mean the cost of carrying debt is low. So he can, as is widely expected, extend furlough and other job-support schemes beyond their current expiry date in April, probably until July. And he can pour money into services — not just health but also education (for catch-up courses) and the courts (to cut backlogs).

This outlook should help guide investors. While there are risks of setbacks, for example in the race to ensure vaccines keep pace with the inevitable virus variants, the central forecast is of a moderate, if hesitant, recovery.

Investors might consider companies likely to profit from a consumer spending surge, or oversold bargains in battered sectors such as retail. As Tom Selby, senior analyst at investment broker AJ Bell, says: “As the vaccine rollout gathers pace, there is genuine hope that society will be able to return to something resembling normal in 2021.”

That all said, it will still be worth keeping an eye on the detail in Sunak’s statement and the barrowload of accompanying documents. In a novel move, the Treasury has announced that it would launch tax consultations on March 23. This will allow the chancellor to separate radical tax-raising ideas from the current Budget while at the same time showing he’s serious about boosting revenues in future.

As far as personal taxes are concerned, Johnson and Sunak have pledged to keep in place the triple lock on income tax, national insurance and VAT. But given the need to raise taxes in future, Sunak might just tweak things at the edges, for example by freezing the thresholds which set income tax, national insurance rates and pension tax relief — if only to soften up his MPs for later.

Those with unrealised capital gains might be advised to cash in and take a tax hit now, as any future CGT changes will be in one direction — up

Capital gains tax, not covered by the triple lock, might also be adjusted to increase revenues, perhaps by tweaking specific concessions or reducing the gap between the lower CGT tax rates and the higher rates applied to income, which can be seen as unfair, especially when richer folk are the ones making most of the gains.

For now, the Treasury is playing down suggestions of radical changes such as a wealth tax on assets to help pay for the pandemic or a wholesale reform of property taxes. Given the proposed new consultation, these ideas will probably remain on the agenda, but held for possible deployment later, when the economy is perhaps less fragile and tax raising more pressing.

But still, those with unrealised capital gains might be advised to cash in and take a tax hit now, as any future CGT changes will be in one direction — up.

Meanwhile, an increase in corporation tax, perhaps of one percentage point, looks possible. Perhaps linked to schemes for further help for hard-pressed sectors such as retail and hospitality, it could be presented as a package in which profitable businesses assist the pandemic-struck. Stock market investors should take note.

But rather than getting bogged down in “possibly this” and “perhaps that”, it’s worth focusing on one near-certainty — support for the green economy, and therefore green investing.

With the UK hosting the United Nations Climate Change Conference in November, the showman in Johnson will not want to appear on the world’s biggest environmental stage without the requisite props. Sunak will almost certainly be asked to provide the wherewithal.

Stefan Wagstyl is editor of FT Money and FT Wealth. Email: stefan.wagstyl@ft.com. Twitter: @stefanwagstyl