Should we all feel a bit of sympathy for Rishi Sunak, the UK’s Chancellor of the Exchequer, who delivered his second Budget on Wednesday this week? It’s an unenviable job, trying to ensure that the 2 million British unemployed are financially supported while simultaneously pondering how the country might pay back the billions it has borrowed and/or created during the Covid-19 crisis. The government’s support to the economy in response to the pandemic will total £407 billion. The Budget announced a further £65 billion in additional spending.
Some commentators believe that the national debt – now £2.1 trillion, which we are adding to at the rate of some £30 billion a month – really is not a problem. It’s certainly not a problem on the US scale, which has a national debt of some $28 trillion. Government debt is not like personal debts on a credit card. Governments always can just roll-over national debt: “when times are hard the whole point of governments is to intervene and support the economy until the private sector comes back” says one financial journalist.
Yet that £30 billion could be spent in better ways than servicing the national debt. It’s about a sixth of the annual budget in 2020/21 for the National Health Service, for example. And the critical point is the presumption that the private sector will come back. It may come back with a vengeance.
The hit from Covid-19
“Coronavirus has caused the largest and most sustained economic shocks this country has ever faced”, said Sunak. Government borrowing, he said, is now on course to reach 97% of the UK’s national income. 97 pence in every pound spent by the government borrowed, in other words.
The Chancellor said the government would do “whatever it takes” to support the ailing economy. So he extended the ‘furlough’ job support scheme (which pays 80% of the wages of those made temporarily unemployed, up to a maximum £2,500) until the end of September; handed out more grants to the self-employed; extended for another six months a £20 increase on universal credit; promised grants worth a total of £5 billion to businesses; and extended a break from the ‘stamp duty’ (the tax payable on buying a home) until the end of June. In the UK, universal credit pays £342.72 a month for single claimants under the age of 25, £594.04 a month for joint claimants aged over 25. There is a complicated maze of other top-ups.
During the pandemic lockdowns, the under-25s have been hardest hit – more than half the total number of unemployed is in that age bracket. But Rishi held out a huge lure for younger people, with his announcement that mortgages will soon be available for as much as 95% of a home’s value for a first-time buyer. That sounds like good news, but memories are short – let’s not forget that 2008’s financial crash was built on “sub-prime” mortgage lending in the US. More young people will be able to buy a home – and more young people who can’t meet the mortgage repayments will find themselves in financial difficulty. Be careful what you wish for.
The can is kicked down the road
The Chancellor made much of his being ‘honest’ in the implications of his Budget, although what he meant by quoting the 19th century poet Tennyson – “That which we are, we are” – is anyone’s guess.
He took a relaxed view when it came to repaying the accumulated debt – personal tax rates will be frozen for four years, which is a stealth tax and will be a pretty big tax grab, especially if inflation picks up. He also raised corporation tax on profits to 25% from 19%; companies with profits of up to £50,000 will continue to pay 19%. That annoyed the Confederation of British Industry, the club of the biggest companies, who fear it may deter investments in the UK.
The Chancellor hopes that the extension of the furlough scheme and cash-flow support for businesses will help keep unemployment from rising above 6.5%. Nevertheless, alarm bells have been ringing among hospitality/consumer services.
Half of firms in this sector say they have less than four months’ worth of cash, while almost a third say they have little or no confidence they can survive the next three months. At some point, the ban on commercial evictions will end, raising the question of what happens to months of unpaid rent for many high-street firms. Repayments on government-guaranteed loans will also begin later this year.
What will happen when the lockdowns finally end? There will certainly be a lot of cash around – Britain’s four big banks took in more than £200 billion in new deposits in 2020. All kinds of firms which have struggled through the months of no customers will be looking to try to claw their way back to profitability. It would be miraculous if some of them didn’t put up prices; and prices which have gone up under Covid – such as dentists charging extra for PPE – are unlikely to come down.
The Office of Budget Responsibility (OBR), which is supposedly independent although is funded by the Treasury (Sunak’s department) thinks the UK economy will grow by 4% this year, 7.3% next year, and 1.7% in 2023. This can only be guesswork.
Let’s suppose Rishi gets lucky, and the UK economy starts to motor again by the summer. A lot of the pent-up savings now sitting in banks will be spent. The markets don’t seem to credit that next year will see a slow-down in government borrowing – the yields on government bonds rose slightly as Sunak spoke. Altogether this is becoming a very heady cocktail, in which more borrowing and a gush of spending might coalesce and cause more headaches down the line. The OBR says that the tax burden will rise to 35% of Gross Domestic Product in 2025-26, a level not seen for half a century.
Rishi Sunak, President Joe Biden, Ursula von der Leyen or any other democratic leader all face an uncomfortable future, trying to square a circle – supporting government give-aways while struggling to reduce government debts. Individuals face an uncertain future too, once lockdown ends. Given that you are not as rich as Rishi Sunak, what can you do?
You could use gold to buy, spend and save as money with your Glint account. Admittedly, the gold price has lost some 15% since it peaked last August at more than $2,000 an ounce; however, compared to late March 2020 the gold price is 15% higher; the price of gold goes up and down. But in its favour gold is no-one’s liability and historically preserves its long-term value. It might just come in handy in the uncertain times ahead.