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UK's Sunak Wrestles With Borrowing Splurge - Wealth Managers' Reactions
Tom Burroughes
26 November 2020
The UK government proposes to freeze public sector pay next year and cut overseas aid in measures to shore up public finances that have been hammered by lockdowns and employee furlough schemes enacted to cope with coronavirus.
Rishi Sunak, Chancellor of the Exchequer, yesterday told fellow lawmakers in Parliament that official forecasts estimate that the UK economy will shrink by 11.3 per cent this year, and will not return to the pre-crisis level until the end of 2022. Government borrowing will rise to the highest level seen outside of wartime. Public sector net borrowing is expected to reach £393.5 billion ($525.3 billion) – or 19 per cent of gross domestic product in the current financial year. This is the highest level of borrowing since 1944/45. Borrowing is forecast to fall to £164.2 billion in the following year, and to £104.6 billion in the year after that.
The Chancellor proposes to freeze the pay of about 1.3 million public sector workers - excluding some health service workers and those earning less than £24,000. Sunak said that pay rises could not be justified when so many private sector employees had been hit and when business owners had been forced to close operations.
Lockdowns to try and contain the virus, while they might have been necessary on medical grounds - a view that remains controversial - have crushed sectors such as hospitality, restaurants, cinemas and sectors where close in-person contact is unavoidable, often forcing small and medium-sized firms to close or go out of business. On the flipside, the pandemic has benefited sectors such as digital communications, certain logistics businesses and home entertainment.
A concern for wealth managers recently has been whether Sunak will embrace calls to push up taxes, such as capital gains tax. Against that is the argument that the Chancellor needs to avoid big tax hikes in order to avoid threatening a recovery.
His measures and comments drew mixed reactions.
“The Chancellor's diagnosis was correct – and it is encouraging that he grasps the scale of the problem. The eye of the economic storm has yet to hit. The COVID contraction is more than double that of the Great Depression in 1931. Five years from now our economy will be smaller than it was at the start of 2020,” Mark Littlewood, director general at the , criticised Sunak for not referring to the Brexit process in the speech, given what problems, he claimed, this will cause for the UK economy.
“Whether it is the loss of access to EU labour for those companies in sectors which are traditionally ‘unattractive’ to UK citizens (e.g., hospitality and food production) or the risk of double social security costs arising for businesses with UK employees active in the EU, this speech represents – in many respects – a lost opportunity to help businesses, especially smaller businesses, handle the delays and additional costs which are probably increasingly inevitable. This isn’t the way for a government which openly talks about building a ‘global Britain’ should be acting,” Salter said.
“Whilst Rishi Sunak has promised capital spending of £100 billion over the coming years and £4 billion on a restart programme for those who’ve been made unemployed, to help ‘level up’ the country and to ‘build back better’ from COVID-19, there appears to be little obvious support in today’s plans for small businesses and the self-employed, especially as one has to assume that the great majority of this capital expenditure will be awarded to larger businesses,” he continued. “Similarly, no support has been announced for those people who are directly self-employed and are presently ineligible for the Government’s Self-Employed Income Support Scheme, for example, because they only set up their businesses in the 2018/19 tax years (or potentially the later part of 2017/18 tax year).”
Richard Carter, head of Fixed Interest at forecasts are underplaying the effect of vaccines on economic activity which would go a long way to filling any fiscal hole. Second, it is not necessarily the case that there will be a fiscal hole anyway if the economy eventually gets back to its pre-virus level as we think it will. This doesn’t mean that taxes won’t have to rise at all to pay for further spending increases.”
“But the danger is that taxes rise by more than spending to fill a perceived fiscal hole and that a fiscal tightening is announced in the next two years before the economic recovery is entrenched. This could be self-defeating if it prevents the economy from getting back to pre-virus levels and could mean that any eventual fiscal consolidation would have to be greater,” it added.