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The March Budget: a holding operation, amid coronavirus-related economic uncertainties

Date: 9th March 2020

The March Budget: a holding operation, amid coronavirus-related economic uncertainties
In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses the 11 March Budget:
    • Given the economic uncertainties, it is now expected that the Budget will be a “holding” operation, with some major decisions held over to the Autumn Budget.
    • The National Infrastructure Plan, planned to be released on 11 March, has been delayed. Nevertheless the Budget is likely to include discussion of the proposed extra investment spending (£100bn over five years), designed to “level up” the regions.
    • A multi-year Comprehensive Spending Review is expected for later in 2020.
    • The OBR is expected to downgrade its economic growth forecasts, partly reflecting the impact of the coronavirus outbreak.
    • The OBR’s borrowing forecasts are likely to deteriorate, not least of all reflecting the expected increase in public spending.
    • There is some speculation the fiscal rules, slackened by Sajid Javid prior to the General Election, will be slackened further, to accommodate extra spending.
    • The Chancellor is expected to announce measures specifically in response to the coronavirus outbreak, for example, loans for small businesses damaged by the outbreak.
    Concerning taxes, possible measures include:
    • Confirmation of the scrapping of the planned reduction in Corporation Tax rate from 19% to 17%.
    • The ending of the fuel duty freeze.
    • A possible reduction in tax relief from 40% to 20% for pensions contributions (for higher earners).
    • A review of business rates.
    • The reiteration of the “five-year triple-lock”, with no increase in income tax, VAT and NI rates. This does not, of course, rule out decreases in rates but there are few expectations of cuts in any of these basic rates.
    • An update on the proposals to increase the NIC threshold to £9,500 in April 2020, with the ambition to raise this threshold to £12,500, in line with income tax personal allowance.
    • The cutting/abolishing Entrepreneur’s Relief.
    • An update on the proposed Digital Services Tax.
    • Expanding inheritance tax. Estates pay 40% on assets worth more than £325,000, but there are exemptions, which may be amended/abolished.
    Reactions to the coronavirus outbreak:
    • The OECD has downgraded its world GDP forecast for 2020 from 2.9% to 2.4%, on the “best-case” scenario. China’s GDP has been revised down to 4.9% for 2020, after 6.1% in 2019. If there is wider contagion, growth could be as low as 1.5% in 2020.
    • The Fed implemented an emergency cut in the federal funds rate by 0.5% to 1.0-1.25% range on 3 March.
    • The Bank announced that it is planning a support package for small businesses, if they are damaged by the outbreak, supporting the Treasury. The chance that the Bank will cut the Bank Rate by 0.25% to 0.5% on 26 March has increased.
    • The ECB has also stated its readiness for coping with the effects of the outbreak.
    UK economic update:
    • The Markit surveys suggested that the post General Election improvement in business sentiment had continued into February, but there were concerns about the coronavirus outbreak.
    • The Bank announced that mortgage approvals for house purchase rose to 70,890 in January, compared with 67,930 in December and the average of the past six months of 66,370.
    UK political update:
    • Both the EU and the UK have released their approaches to negotiating the new UK-EU relationship and talks began on 2 March. Differences include the EU’s support for the “level playing field” and divergent approaches to fisheries.
    • The UK has released its negotiating position for talks on the proposed UK-US FTA.

    Ruth Lea said, “It looks increasingly likely that the March Budget will, in some ways, be a “holding” operation with major fiscal decisions left until Autumn 2020, not least of all because of coronavirus-related economic uncertainties and the Chancellor’s short tenure. It is expected the OBR will downgrade their growth forecasts and, given the likely increase in public spending, the borrowing forecasts are likely to deteriorate. Even though the release of the National Infrastructure Plan has been delayed, it is still expected the overall strategy of increasing investment spending in order to “level up” the regions, which broadly foresees spending £100bn over this parliament, will still be reflected in the March Budget.”

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Ruth Lea, Economic Adviser
07800 608 674, 020 8346 3482
Follow Ruth on Twitter @RuthLeaEcon

Sam Cartwright
020 7379 4415
Jais Mehaji
020 7379 5151