Rishi gambles on future productivity

Chancellor Rishi Sunak is pinning his hopes on a supercharged boost to productivity to ensure future economic growth.

The Budget unveiled by Mr Sunak had more of the hallmarks of former Labour Chancellor Gordon Brown than one you would typically associate with a Conservative government.

Rather than austerity, Mr Sunak announced an extra £150billion of cash for schools, hospitals and the justice system, paid through a combination of better than expected economic growth and higher taxes.

The Office for Budget Responsibility (OBR) underscored this by revealing that the overall tax burden will be the highest since the post-war Labour government of 1945-51 and spending at its highest since the 1970s.

While the early recovery from the pandemic has been better than expected, the Government is clearly confident it can get a further positive reaction by pumping more money into the economy, stretching out Government spending and keeping a lid on inflation.

To encourage greater productivity, the Chancellor made a series of funding pledges in areas including R&D, technical education and skills training, building on the announcement in March of the Super Deduction capital allowances to boost investment rates and described by Mr Sunak as the “biggest tax cut ever for businesses”.

But I am concerned by the level of debt this Government is willing to shoulder, something that is being mirrored around the globe with other governments taking a similar approach.

With the focus on spending, there was little movement on personal tax and notably absent was any mention of Capital Gains Tax, Inheritance Tax or Pension Tax Relief.

CGT had already been absent from the March Budget despite talk of a possible alignment with income tax.

And, with no mention this time around, it is now not inconceivable that any further changes may now be delayed until after the next General Election, which may come sooner than expected if the Chancellor’s gamble on increased productivity pays off or if Prime Minister Boris Johnson wants to rush to the polls before trouble hits the fan.

For all Mr Sunak’s positivity in his Budget speech, the elephant in the room remains inflation.

We are currently in the final stages of managing the effects of rising inflation on our client portfolios and it is something that naturally gives clients cause for concern because of the impact it has on the value of their income and assets.

A single percentage increase in interest rates takes an average 10% off bond values.

While inflation is now only expected to hit 4% in 2022, below previous forecasts, this still represents the highest it will have been for the majority of the last 30 years.

Any worsening of this and Mr Sunak’s announcements such as the increase in Minimum Wage and the end to the public sector pay freeze will count for little if people find the value of their pay packet has barely increased.

Despite the boosterism of this Budget, the Government will undoubtedly be watching nervously where inflation goes over the coming weeks and months.

While MPs, particularly those in the so called ‘Red Wall’ seats that fell to the Tories in the 2019 election, know that austerity is definitely not a vote winner, they will also be only too aware that rising inflation isn’t either.