Chief Economist Tom Hall’s Budget Reaction

Chief Economist Tom Hall’s Budget Reaction

Tom Hall, Chief Economist
@tlheconomics

With shafts of restriction-easing light starting to spear through the gloom of the third national lockdown, the 2021 budget focused on maintaining much-needed emergency support measures to lessen the damage wrought by Covid-19. The chancellor, a fiscal conservative, again made it clear that support measures are time limited and will be withdrawn in the autumn.

The government is banking on successful vaccines to avoid future lockdowns. As we learn to live with the virus, what overall level of activity we can return to remains unclear. Additionally, a “cliff-edge” strategy to withdrawing support is a risky approach to take.

Those hoping for the start of “build back better” were disappointed as the budget focused on shorter term support measures rather than long-term transformational proposals.

Short term benefits for the construction industry include a continuation of stamp duty that will maintain housing demand in the short term. Increasing investment is a clear aim: the creation of a £12bn infrastructure Bank will be welcome news, though it is only a start. Greater tax breaks for investment will be attractive to firms.

The economy needs to be given the best chance of rebounding strongly to recover lost ground and grow strongly in the future. This will allow much greater ability to shoulder tax increases to reduce the national debt. An anaemic recovery coupled with tax hikes that fall on the least able to bear them will be catastrophic.

The policy response therefore requires the gradual withdrawing of support, and the encouraging of activity coupled with a strong visionary “build back better” programme. The government, sensibly, is maintaining support measures, but it risks cliff-edges and punishing tax rises, and “build back better” still lacks any detail or scale that will give certainty to businesses and consumers.

 

Rebecca Larkin, Senior Economist at CPA: “Support for construction is largely indirect, such as the stamp duty holiday, employment scheme and business grants. With these in place to September, recovery hopefully will be on a firmer footing, underpinning demand for new construction projects. However, the £12bn funding for the new UK Infrastructure Bank represents only a small proportion of the overall £600bn government pipeline of projects.”

 

Furlough scheme & business support

  • The furlough scheme that contributes 80% of employees’ wages will be extended to September, with firms contributing 10% and 20% in August and September as support is tapered.
  • This will be good news for companies but risks a rapid increase in unemployment and business insolvencies as support is withdrawn.
  • £5bn for business restart grants, plus a new loan scheme to run until the end of the year of between £25k to £10m.

 

Chris Davies, Managing Director at DRS Bond Management Limited: “The Stamp Duty holiday is great news for housing market stability. The furlough extension is welcome, not least as Construction has used it extensively over the past 12 months.”
Housing market

  • A 3-month extension of the stamp-duty holiday was confirmed for properties under £500k.
  • This will maintain housing demand but only puts off a likely realignment of the housing market until the summer.
  • A mortgage guarantee scheme will provide government guarantees for 95% mortgages.
  • Our data suggests activity in the residential market is continuing at lower levels: housebuilders have one eye firmly on the economy as they build out developments.

 

Andy Murphy, Commercial Director at Hanson: “Early signs are that latent demand is strong and order books are reflecting that. Let’s hope that the support is not short-lived because we need to make sure that we build our way back to full economic health.”

 

Infrastructure & levelling up

  • A new infrastructure bank will be set up in Leeds with a pot of £12bn. This is welcome, but only a small start in terms of the scale of investment needed.
  • There will also be a “green bond” to encourage investment in green infrastructure.
  • Eight free ports will be created to make it easier to do business. The benefits are questionable but follows through a government commitment.

 

Nathan Garnett, Director at UKCW: “It has been clear all along that this Government sees construction, whether house building or major infrastructure projects, as a means to stimulate economic growth as we recover from the pandemic.”

 

Tax

  • Corporation tax will rise from 19% to 25% in 2023 to levels comparable to international averages. There will be allowances for firms with profits less than £250k that will benefit 90% of firms.
  • To address weaknesses in investment, a new “super deduction” tax break for firms that invest in new equipment will allow firms to reduce their tax bill by 130% of the investment amount.
  • There was no windfall tax for companies who have profited during the pandemic.
  • Employment and skills
  • Incentive payments for firms hiring apprentices will double to £3,000.
  • There will be £126m to help businesses convert trainees into apprentices.
  • A new visa system for people with high-level skills to attract research and development.

 

Iain McIlwee, CEO of FIS: “A Recovery built on investment is absolutely the right approach. The doubling of incentives to support for apprenticeships is welcome, but It would have been good to go further and guarantee that the Apprenticeship Levy is ringfenced and adapted to support further investment. The focus on additional support traineeships is also encouraging.”

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