On the 3 March, the Chancellor will deliver one of the most important Budgets any Chancellor has been called upon to deliver.
If it wasn’t for the virus, his key objective would have been to deliver measures that would begin to transform the economy into one that would reflect his vision of the post-Brexit economy that he believes will be successful. These measures will require spending and will take time before they deliver measurable results.
Unfortunately, a pesky virus took a toll on the economy in 2020. It is probable that the economy shrank by 10% between the end of February and December. Further shrinkage would be expected to occur during the first part of 2021 due to the January lockdown.
By Budget day we should hopefully be beyond the worse of this second wave of the virus. The number of infections, people in hospital and deaths should all be in retreat. Even with the effects of the vaccination programme any relaxation in lockdown will be small, for a while yet.
Any economic downturn results in scarring. Businesses, valuable plant, machinery and employees all end up on the scrap heap.
A question that many do not discuss is whether it is at all possible to eradicate the virus completely? Remember this is a global pandemic and to eradicate completely means, unless there are permanent travel restrictions, there will continue to be outbreaks, and mutations of new strains after we believe we will have beaten it in the UK. Also, outbreaks grow rapidly. Look at the recent experiences of the Isle of Wight and Knowsley.
Even if the total population has been vaccinated, around 5% could still be susceptible to becoming ill from the virus, and potentially 100% of us could transmit the disease. A modified track, trace and isolate policy may still be necessary in 2022 to protect the 5% until another solution can be found.
This brings us back to the Budget. For many months after, the economy will be constrained by health measures. The UK is basically a consumer-led economy, therefore what is required are measures that lead to an improvement in consumer confidence.
Surveys indicate that as a result of the events of 2021 roughly 20% of households consider themselves to be better off. This is due to their income remaining constant or improving and reduced spending opportunities. 30% of households consider themselves worse off. This is across all income sectors.
I know personally a specialist in the events’ sector whose annual earnings are well into six figures. They have had no work since March. His immediate prospects do not look good. I am sure he is not unique. Comfortable households where both adults work, may have experienced one of them having no work or having been long-term furloughed on reduced income.
Unemployment is running at 5% and growing. Furlough schemes hide much unemployment. Job losses among the over-50s have been among the largest and we know this age group finds it hardest to get back into work.
Spend, a little…
In the short term, the economy needs those better off households to spend some money. This should be the Chancellor’s aim in this Budget. This will help businesses survive or even grow, underutilised plant and machinery to be more actively engaged, and for employees to be retained and new jobs to be created.
What worries me is that the Chancellor is under pressure to introduce tax increases to begin balancing the books. Such a move will withdraw money from the economy resulting in less spending. It is easier to balance the books with a growing economy than with a contracting economy. How many more furloughed employees will join the unemployed if the economy does not show a strong rebound in 2021?
This creates a dichotomy for the later life lending market. If the Chancellor does try to rebalance the books, we should see a rapid increase in those approaching retirement looking for solutions to help finance their retirement. They will have smaller pension savings. Also, they will have family members they wish to help.
But be careful what you wish for. The consequences of an economic downturn that is longer than necessary could result in foreclosures, a reduced population able, or looking, to buy houses and negative equity amongst those who are more leveraged or new to the housing ladder. All will reduce the amount that could be borrowed.
On the other hand, measures to grow the economy should mean that the steady growth of the later life sector continues. As I say, this is one of the most important Budget announcements for a long time. Let us hope the Chancellor gets it right.
Bob Champion is chairman of the Air Later Life Academy