UK Budget 2021: Rishi's route to recovery

Schroders experts Rory Bateman and Keith Wade discuss the market and economic implications of today's UK Budget. 

Rory Bateman, Portfolio Manager, Schroder British Opportunities Trust plc: 

“For small and mid-sized UK companies, Rishi Sunak’s budget should be very welcome. His clear intention is to ensure the economy recovers strongly and although corporate tax rates are set to rise in April 2023, British businesses will continue to benefit from low rates, as well as generous business investment tax relief. 

“Portfolios with high levels of exposure to industrials and construction look really well positioned given the help provided to the housing market through the stamp duty holiday extension and the new mortgage guarantee scheme, both of which should help stimulate housing market activity.

“The Schroder British Opportunities Trust holds a number of companies that will benefit from these government initiatives as the construction and repair, maintenance and improvement market strengthens through the recovery. In addition, the UK Infrastructure Bank will provide capital and government guarantees totalling £22bn to further boost these areas, as well as specifically providing funding for high-growth start-ups.

“Business investment is a key theme of the budget, with tax relief benefits of £25bn over the next two years designed to ‘spur investment’. We are particularly excited about the benefits of this relief to UK software companies and SMEs which are another key theme for the Trust. For example, the government is expected to cover half the costs of approved software up to £5k which should benefit our learning technology and artificial intelligence companies.

“Confirmation was given that the furlough scheme will be extended to September 2021, although businesses will be asked to make contributions of 10% in July and 20% in August as the scheme is phased out. While this latter nuance was unexpected, the net effect should continue to alleviate pressure on the UK’s unemployment rate, which should be positive for equity market sentiment. Many consumer companies can now see the light at the end of the tunnel and we have increased our exposure to these companies given the pent-up demand which we expect to come through.

“While the overall effects of the budget are positive, we should of course recognise that British companies have faced unprecedented difficulties over the last year and we continue to see excellent opportunities for investment. Increased activity in the IPO market and companies coming to market for equity capital is a sign of confidence about the future and our new Schroder British Opportunities Trust is ideally positioned to take advantage of the growth prospects ahead.”

Keith Wade, Chief Economist & Strategist, Schroders: 

“An ambitious chancellor set out his plans not just for the near term recovery, but also to meet the government’s promises of levelling up the economic geography of the UK and to repair the public finances over the medium term. It was a budget to take us through the pandemic and beyond.

“We knew that the furlough scheme would be extended for another six months, but Chancellor Rishi Sunak is extending all the support made available during the pandemic including the stamp duty holiday on property, the lower rate on VAT and business rate relief. He is also adding a new restart grant of £5 billion from April. Meanwhile, he is freezing all duties on fuel and alcohol for the fiscal year. These measures will gradually be tapered as the economy normalises but overall the chancellor is adding more stimulus in the near term.

“We would see this as a reaction to the longer-than-expected lockdown which will hold back the recovery in 2021 before stronger growth comes through next year. The official growth forecast for 2021 is downgraded to 4%, but the Office for Budget Responsibility now expects this to be followed by a booming 7.3% in 2022.

“The fiscal consolidation comes later and is led by a rise in corporation tax from 19% to 25%. This is a significant move and almost identical to the 26% proposed by the then hard left Labour party which lost the last general election. Alongside this the chancellor is planning to freeze all tax brackets for households. Penned in by his party’s promise not to raise taxes in the election manifesto, Chancellor Sunak is relying on that favourite stealth tax, fiscal drag.

“So fiscal consolidation is coming, but the can has been kicked down the road. In the meantime, along with the Covid relief measures, the chancellor is throwing as many goodies at business as possible: he also announced enhanced tax allowances (“super deductions”) along with subsidised training and software for firms.

“This means that the UK will run large deficits in the near term of just over 10% GDP in 2021/22 and 4.5% in 2022/23. Further falls are projected but by then the government will have turned its attention to the 2024 general election so any fiscal tightening will be off the agenda. The economic and political cycles are truly out of line for this government, meaning there is little likelihood of hitting those medium term targets.”