Budget 2020 reactions: Chancellor ‘tore up fiscal rulebook’

Ellie Duncan reports...

In his first Budget, Chancellor of the Exchequer Rishi Sunak “tore up the fiscal rulebook” and delivered a potentially “trend-setting” Budget, according to industry commentators.

David Zahn, head of European fixed income at Franklin Templeton, said: “The first UK Budget from Prime Minister Boris Johnson’s government revealed much more of a fiscal expansion than what we’ve come to expect in the past, unveiling a £30bn spending package with special funds earmarked to mitigate the impacts of the coronavirus on the economy.

“Sunak, who was only appointed Chancellor last month, has torn up the fiscal rulebook that his predecessor Sajid Javid agreed to with Johnson. This included pledges to use revenues to cover day-to-day expenditure, lower public debt and limit public sector net investment to 3% of gross domestic product (GDP).”

But he said that while there were “lots of spending promises” made by the Chancellor, there was “very little in the way of explanation of how the bills will be paid”.
“Clearly, many measures announced today are aimed at combatting the economic effects of Coronavirus on the UK economy,” he added.
The Chancellor announced a £30bn package of fiscal stimulus in the 2020-21 financial year in the first Budget of this parliament. He also quoted the Office for Budget Responsibility (OBR) as saying it is the largest sustained fiscal boost for nearly 30 years.
“Investors will welcome the increase in fiscal spending, infrastructure spending, and especially the support of UK businesses,” said Gwilym Lloyd Jones, senior wealth manager at Sanlam UK.
He added that it could be a “trend-setting” Budget, “encouraging other countries to follow suit”.

Economic stimulus

Andrzej Pioch, multi-asset fund manager at Legal & General Investment Management, said:

“A £30bn fiscal stimulus amounts to 1.5% of GDP, with the government willing to do more if needed. This provides decent initial support for stimulating the economy.”

He added that it was “in line with market expectations as we have seen little reaction in sterling and gilts at the time of the announcement”.

Adrian Lowcock, head of personal investing at Willis Owen, called it a “real bazooka” of a response by the Chancellor to the coronavirus.

“£30bn of stimulus, and the promise of more if needed, is a credible, sensible response to a crisis that has impacted the entire globe.”

But Rupert Thompson, chief investment officer at Kingswood, said it was “far from clear” whether the fiscal and monetary response announced today “will be sufficient to prevent the economy dipping into recession over coming months”.

“The best case scenario for the economy – at this point at least – seems to be a technical recession, that is a one-to-two quarter economic contraction, followed by a rebound towards the latter part of the year,” according to Anna Stupnytska, head of global macro at Fidelity International.

She added that achieving the OBR’s forecast of 1.1% growth in 2020 is “verging on impossible” and that a more realistic scenario for now is zero GDP growth this year.

Austerity to prosperity

In his speech today (11 March), the Chancellor also set out his “plan for prosperity” which starts immediately.

The Budget was a “far cry from the austerity Budgets of the recent past”, according to Shaniel Ramjee, senior investment manager, multi asset at Pictet.

Ramjee added: “In many ways the Budget stayed true to the Conservative manifesto of levelling up, providing funding to infrastructure, public services, while attempting to lower the cost of living and lowering taxes for those for whom it matters most.

“The funding of the Budget will be scrutinised by the OBR, but they have already termed it a sustained fiscal boost.”

Green investment

While the Chancellor did announce plans to increase taxes on pollution, Ed Smith, head of asset allocation research at Rathbones, said the “lip-service paid to green investment was very disappointing”.

“Climate change is a material risk to the economy and the financial sector. The evidence is quite clear now. The government needs to facilitate more investment in a green energy revolution,” Smith added.

Pensions reform

The Budget delivered some changes to pensions, with the Chancellor’s announcement that the threshold for the tapered annual allowance (TAA) will go up £90,000, from £110,000 to £200,000.

“Tinkering around the edges of pensions taxation is not going to solve the issues. The government have not gone far enough to ‘get this done’,” said Nilesh Shah, specialist in executive pensions at Barnett Waddingham.

“While some of the high earners will see their AA tax bills reduced by up to £13,500 net, four years after its introduction the complexities are still there. The Chancellor should have got rid of the complex TAA.”

Jessica List, pension technical manager at Curtis Banks, said while the industry might have hoped for it to be scrapped altogether, the change to the TAA “is still good news for now”.

List added: “Although the increases to the threshold and adjusted incomes will be welcomed by most, there’s a sting in the tail for very high earners whose minimum allowance will be cut further from £10,000 to just £4,000 – the same as the current MPAA.”