This month’s budget has the distinct feeling of the morning after the night before. Having seen our government inject enormous fiscal stimulus to get us through this pandemic we turn to the question of how on earth it is to be re-paid.
The Chancellor yesterday day went to great lengths to stress that he was levelling with the British people about the cost of re-paying our debt. This is unlikely to be the case. The credibility of this budget is built on the notion that corporation tax will, after two years, rise to 25%. In reality, it is highly unlikely that any Conservative government will follow through on such a move. We believe that this is simply the Chancellor taking the view that he will cross that bridge when he comes to it. Overall though, we should note the major efforts here to provide support for business investment. This reflects the reality which is that the only way this debt can be tackled is through very substantial economic growth. We are all Keynsians now.
There will be many within the Conservative party, including luminaries such as Kenneth Clarke, who argue that there is a more urgent need to increase taxes than is understood. We believe however that the only way through this debt crisis is through growth-fuelled investment. One of the more striking observations therefore in this regard is the plan to offer a ‘super deduction’ to businesses to fuel investment in the coming two years. This will contribute to the UK economic bounce back.
Indeed, we continue to believe that the UK will bounce back faster than most of the rest of the developed world. This is both as a result of the effective vaccine campaign and also the ultra-loose co-ordinated monetary and fiscal policy in place.
One day we will all start to feel the squeeze of frozen tax rates and we cannot put away our fears that ultimately there will be new raids on pension tax relief and ISA limits. However, for the moment we can be pleased that UK economic growth has been upgraded for next year and that the scene is set fair for recovery. We believe our overweight position in UK equities will enable our portfolios to benefit from this.