Budget 2021: Market reaction muted, BoE mandate raises eyebrows

• Green around the gilts? New net zero mandate for Bank of England
• CGT frozen – good news for investors
• Markets steady, gilt yields hit lows of the day

“That which we are, we are”. Rishi Sunak channelled Tennyson and the wanderer Ulysses in one fell swoop to sum up his Budget. I’m none the wiser.

Given the ‘rabbit in the hat’ was the launch of a cluster of free ports, you could be forgiven for thinking this Budget to reset the economy for a post-Covid and post-Brexit world was way off the mark. Free ports are not what the chancellor, who has championed them for some time despite evidence suggesting they deliver marginal benefits, thinks they are.

Fixing the public finances. Do whatever it takes. Full measure of our fiscal firepower. Don’t let underlying debt rise ‘indefinitely’. A freedom to act – a freedom to raise taxes. All pretty orthodox stuff. There was tough talking but for now no real pain – the payback comes later. Maybe Sunak has been reading Kelton lately after all, but he did try to disguise years of central bank accommodation and, during the pandemic, direct monetary financing by the BoE, as ‘Tory fiscal rectitude’. Political point scoring has not gone away but on the whole there was a lot of good stuff in here for kick-starting the economy.

Markets

Not a huge reaction overall – a lot had been pre-released and let’s face it the bond vigilantes ain’t what they used to be. Longer-dated yields did move – 30-year gilt yield up 9bps to 1.31%, but 10-year gilt yields ticked lower all morning and slid to LOD after the chancellor began talking but were still up 7-8bps on the day around 0.765% having opened up higher. Implication from the OBR is that we get better growth leading to less borrowing now, but longer-term borrowing likely to remain high. The FTSE 100 ticked lower through the speech having tested its highest in a week earlier this morning. Larger-than-expected hike to corporation tax maybe a factor here but we have seen a broad move lower in European markets and US futures in the last hour or so . The FTSE 250 also eased back off its highs but remains up +1% today. GBPUSD was around 1.3950. Shares in pubs and housebuilders were higher, Lloyds and Barclays both advanced too as banks picked up.

Highlights: Economy

• OBR forecasts – swifter and more sustained recovery thanks to vaccines than was forecast in November. GDP will return to pre-crisis levels in Q2 2022, 6 months sooner than previously thought. Long-term scarring of 3% – which underscores just how damaging the response to the pandemic has been. Lockdowns are not a zero cost option – instead it is a zero sum game that required more balance.

• Growth in 2021 is forecast at 4%, vs 5.5% in Nov, which reflects the lockdown lasting longer than expected at the start of this year. However, things pick up in 2022, with forecast growth of 7.3% vs 6.6% expected in Nov. In 2023-2024 growth stabilises at around 1.6-1.7%, broadly in line with the Nov forecast.

• Peak unemployment will be 6.5%, much better than the 7.5% expected in Nov – highlighting the impact of the furlough scheme extension, which has avoided an unemployment cliff edge. Borrowing won’t be as bad as feared but remains exceptionally high.

• Furlough will be extended until September as expected. Support for the self-employed will also continue to September. 3 months support at 80% average profit.  More support for the newly self-employed – provided they provided a tax return by midnight last night – claim 4^th and 5^th grants.

Highlights: Taxes

• Business rates holiday through to end of June, two-thirds through to end of the year. More support for hospitality with reduced 5% VAT rate to end of September, interim rate of 12.5% for 6 months, 20% by April.

• Housebuilders: Stamp duty holiday extended to Jun 30^th as expected, the nil rate band to £250k until end of September. Mortgage guarantee – 95% deals back – also as expected.

• No straight personal tax hikes or increase to VAT. Freeze personal tax thresholds – this is a stealth tax. A 4-year freeze on tax thresholds amounts to a pretty big tax grab, whichever way you look at it, especially if you think inflation is going to pick up. This will amount to a headwind for real income growth over time and may weigh on cyclicals.

• Capital Gains Tax – Inheritance tax, pensions lifetimes allowance, capital gains tax and VAT registration threshold also frozen. No change to the CGT threshold will be a positive for owners of shares and CFDs. Annual exempt amount to stay at £12,300 up to an including 2026. This is a big one for retail investors and traders.

• Corporation tax to increase to 25% by 2023 – still low in G7 terms but a bit tougher than expected. Brussels can rest easy – London is not going to be Singapore a cote de la Manche. Not many companies will pay this – about 10%, and a super deduction for tax for losses is a punchy move designed to encourage spending by businesses. Companies will be able to reduce tax bills by 130% of business investment.

• No hike for spirits, wine, cider and beer will not go ahead. All alcohol duty frozen. Fuel duty hike also cancelled. If only we could get down the pub to celebrate this progressive policy. Pub groups will be pleased but there is no reduction, which would have helped. Didn’t hear a mention of Eat Out to Help Out either.

• Introduction of a green and environmental mandate for the Bank of England. The Old Lady gets a new policy remit that reflects importance of environmental sustainability and transition to net zero. Good luck with that. We await to see what this really means for the BoE. Green gilts?