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31 March 2021

The Budget and the Markets

The most recent Budget contained a plethora of new measures, as well as extensions to existing Government policies, to help kick start the economy as the UK progresses at pace with vaccinating its population. The Government has now pumped £400bn into COVID-19-related spending with the main policies focused on helping cash-starved businesses, employment, housing and taxation, all of which impact businesses and the markets, either directly or indirectly.

The Chancellor is hoping that, amongst other things, the extensions to the furlough scheme and the Stamp Duty holiday will help to create a domino effect that starts with capping the unemployment rate and moves through the economy as consumers continue to receive regular monthly inflows, giving them the ability to continue paying for their houses, cars and other monthly expenses. This helps to keep the general economy ticking over and prevents a widespread failure of any key industry.

The hope is that some will also have been able to save money during the pandemic as consumer spend on retail, leisure and travel fell significantly, while those with stable employment were able to save or invest money that would have typically been earmarked for discretionary spending. This will help to accelerate the economic boom many are expecting to occur after lockdown restrictions are lifted, as consumers feel more comfortable in open environments and spending habits return to normal levels.

While a wave of spending in order to boost the economy was needed, public finances are now in a significantly worse state than at the start of 2020. The Government has had to raise large amounts of capital in order to support businesses and consumers, with the level of debt currently unsustainable and unhealthy for the country moving forward. The tax increases expected by many are, then, the most obvious and arguably best way to help plug the hole in the UK’s public finances. Rather surprisingly, however, the Chancellor decided to adopt a ‘spend now tax later’ policy that focuses on corporation tax more than income tax.

Although this will likely prove popular amongst consumers, many of whom believe that the needs of businesses have been put before those of the general public for many years, the proposed rise in Corporation Tax from 19% to 25%, set to begin in 2023, on companies earning more than £50,000 a year in profit will likely ruffle some feathers amongst business leaders and those in the City. The 6% rise will push up the UK’s Corporation Tax rate to a level not seen since 2011 and will be the first rise since 1974, bucking the long-term trend of falling rates. While this would place the UK as the third lowest in the G7 in terms of Corporation Tax after Italy and the US, it would signal a move away from the lower end of Corporation Tax rates for the UK compared to its peers globally, potentially hindering investment going forward with many now viewing the UK as a less attractive place to do business.

One of the main arguments against a rise in Corporation Tax is the potential subsequent reduction in spending across areas such as employment and investment, which would be undertaken in order to maintain profitability. While the rise in tax will clearly impact a firm’s finances, reducing its overall profit after tax, the Government announced a new incentive scheme in order to combat the potential reduction in investment. The new ‘super deduction’, which will run until 31st March 2023, will allow companies to claim up to 130% on their capital allowances on certain plant and machinery investments. This effectively means that for every £1 that a firm invests, their taxes are cut by up to 25p. This, in theory, should help to both improve the financial health of the Treasury and encourage companies to continue to hire new staff, as well as invest in new equipment and services, fuelling a positive economic rebound.

The headline increase in Corporation Tax will, however, be a bitter pill to swallow for both business leaders and investors. Income-seeking investors have long relied on the UK for its high dividend payout culture, especially within the FTSE 100 with many firms paying over 5% a year. The increase in Corporation Tax will likely take a sizeable chunk from companies’ net profit figures, meaning that each investor will now be entitled to a smaller piece of the pie. This will either force companies to reduce their pay-outs and risk a loss of interest from those investors seeking income or retain their income payments at similar levels and risk a material negative impact on their internal finances, especially if the firm is already paying out all or the majority of its profits in the form of dividends.

The Chancellor has given corporations and markets plenty of time to prepare, however, with a two-year wait helping to ease the pain, allowing companies to get back on their feet and increase profitability before the costs of the pandemic are paid back. This certainly seems a sensible move and will remove some of the uncertainty moving forward, even though the decision does not fall in their favour.
The Budget and the Markets
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