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2021 Budget: is it bust or boom for investors?

The outcome tipped in favour of propelling the economy forward, but the sombre note of caution that accompanied the budget forewarned of straightened times ahead. So how can you safeguard your assets from the impact of budgetary changes?

UK Chancellor Rishi Sunak was in the unenviable position on Wednesday of delivering a budget that walked a fine line between supporting the hobbled economy with relief measures and trying to rein in spending to deal with an exponential deficit. The outcome tipped in favour of propelling the economy forward even if at the expense of fiscal prudence, but the sombre note of caution that accompanied the budget forewarned of straightened times ahead. So how can you safeguard your assets from the impact of budgetary changes?

Furlough extension

The government will extend the furlough scheme to the end of September in a move designed to avoid a precipitous rise in unemployment as companies badly affected by the pandemic contract or close. The Office for Budget Responsibility (OBR) now predicts unemployment will peak at 6.5 per cent at the end of 2021, “but the peak is around 340,000 less than the 7.5 per cent assumed in our November forecast, thanks partly to the latest extension of the furlough scheme.”

The decision will be a welcome boost to employees in badly affected sectors but comes at a substantial cost to the ever-growing debt pile accrued during the pandemic. 

Propping up the property market

The property market was afforded a stay of execution after the chancellor extended the stamp duty holiday for another three months. Property prices have been on the rise since the market reopened following the first lockdown hiatus but had come off the boil as the deadline for stamp duty relief edged closer. While an extension will provide a fillip to the property market now, when the next deadline approaches there may be a similar cooling.

Property hasn’t had any real opportunity to react to the economic impact of the pandemic as it has been repeatedly propped up by government incentives. A new mortgage guarantee scheme, in which buyers with only a 5% deposit can have the remainder of the mortgage value guaranteed by the government, is another fiscal stimulus designed to shore up the property market. 

The expectation for unemployment and the impact on many households of the lockdowns and economic contraction may yet dampen property market enthusiasm. However, for now, and until at least the end of June, saving thousands on stamp duty will incentivise homebuyers to move.

Market stimulus?

The budget was brimming with stimuli for a range of hard-hit sectors including the hospitality industry, and retail, and even matched-funding of up to £250,000 for villagers to club together to buy their local pub. The bonanza will be a welcome reprieve for hotels, bars, travel companies, theatres and the recreational providers that have been closed for months at a time and seen their earnings dwindle while costs remain stubbornly unmoving.

Sunak is freezing the reduced 5% VAT rate on hospitality and tourism for another six months until 30 September and the high street and hospitality sector can call on £5 billion of start-up grants.

Muted financial market response

At least some of the widely trailed budget was already factored into share prices, and the market response on Wednesday was muted, although the FTSE100 ended up 0.9% on the day. While these stimulus packages will once again swell the corporate coffers, Sunak also announced a corporate tax rise to 25% from 19% in 2023. He reasoned that companies have benefited from the growing debt pile and will need to contribute to reducing it. Meanwhile, he is incentivising companies to invest with a tax break on new plant and machinery assets.

UK tax hike set for 2023

The rise in corporation tax to 25% in 2023 was the most obvious ‘tax raid’ but there were other so-called stealth tax rises in the form of a freeze on the threshold before income tax is paid. The freeze, effective until 2026, means that when incomes rise with wage inflation, taxes will be paid on more of that income.

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The freeze also applies to inheritance tax, pensions lifetime allowance and capital gains tax. The CGT freeze is a boon for investors because a consultation last year, prepared by the Office of Tax Simplification, suggested that CGT be aligned more closely with income tax which would have doubled the tax burden on share and asset sales. This hasn’t been included in the budget and will provide a welcome reprieve for investors.

Economic recovery and the debt mountain

Sunak was at least realistic when he warned that the economic repercussions of the COVID-19 pandemic are ‘acute’ and will be felt for a long time. “Our economy has shrunk by 10% – the largest fall in over 300 years. Our borrowing is the highest it has been outside of wartime. It’s going to take this country – and the whole world – a long time to recover from this extraordinary economic situation. But we will recover.”

The sombre note is a realistic vision of the future, because the government will have spent £400 billion on measures to reduce the impact of the pandemic, and it will ultimately need to be paid back. 

The economic outlook for 2021 is more demure than previously expected. GDP is expected to grow by 4% in 2021, compared to the 5.5%  previously forecast. That said, the economy is expected to regain its pre-pandemic level in the second quarter of 2022, six months earlier than the Office for Budget Responsibility (OBR )forecast in November.

Like the years of Brexit negotiations that saw politicians kick the can down the road repeatedly, the immediate effect of large-scale government spending has been to avoid a sharp shock to the economy. However, this approach is inevitably storing up debt issues for the future. 

The debt is too large to be subsumed into the normal business of the next few years, and the effect of the recovery will be felt for some time. The OBR  expects the pandemic will “lower the supply capacity of the economy in the medium term by around 3 per cent relative to pre-virus expectations.”

So what does that mean for physical gold?

Gold has been a very generous long-term investment, rising almost 600% over the last 20 years against the backdrop of the financial crisis, Brexit, the Trump years and the global pandemic. 

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The budget may not be an immediate tax raid for individuals but gold coins are VAT and Capital Gains Tax-free in all circumstances. This remains true however the chancellor decides to balance the books. Over the medium-term, as the economy is forced to reckon with the pandemic largesse, physical gold’s financial safe-haven status will provide a port in the storm.

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