Lockdown - Reflections at the end of week 50

If you are not a fan of the royal family soap opera, the big story this week has been the budget. Whilst a number of its contents were progressively pre-announced in the days leading up to the budget speech itself, there remained some considerable uncertainty in the minds of observers as to how the whole conundrum of state support and paying for it would be addressed. That uncertainty was borne out by the substantial number of corporate transactions that we were involved in in the weeks leading up to the budget, many of which were driven by a concern that there would be immediate rises in capital gains tax.

At the core of the commentators’ difficulties was political theory and, in particular, the approach to tax and spending taken by successive Conservative governments since Margaret Thatcher walked through the door of 10 Downing Street as Prime minister for the first time in 1979. The core philosophy enunciated during that time has been to shrink the state, reduce reliance on state support and keep taxation low. Those of us who are old enough to remember will have in mind, for example, the Labour’s Double Whammy and the Labour’s Tax Bombshell poster campaigns which sat at the core of the Conservative Party’s 1992 general election campaign. The truth hasn’t been quite in line with the stated policy, since eye-catching reductions in direct taxes have often been counterbalanced to a substantial degree by increases in indirect taxes, but the political philosophy has remained.

Against that background, a Conservative chancellor was faced with circumstances where substantial numbers of people have lost their jobs, millions remain on furlough, thousands of businesses remain closed or substantially impaired in what they can do and the gap between many of the haves and the have nots has grown primarily due to the circumstances of the Covid virus and anti-Covid measures. The spectre of further significant growth in unemployment loomed and consumer confidence remained thin.

So how did he deal with it? In essence, he ignored the political heritage. State support was continued, with an extension of the furlough scheme, the additional £20 on universal credit and support packages for businesses in the most affected sectors, including retail, leisure and hospitality. A number of regional investment initiatives were announced, and further support was made available to the self-employed. At the same time, in what constituted probably the largest about turns from the approach of his Conservative predecessors, he announces direct tax increases, the first to be achieved by a freezing of tax allowances and thresholds and the second by a significant hike in corporation tax, albeit postponed for a couple of years. There were, of course, many other details in there, including some very generous capital allowances and some spending cuts.

He has been helped by economic forecasts of stronger than expected growth and by forecasts that the unemployment rate, whilst high, will not be as high as once feared. It remains on a bit of a knife-edge and will still result in (and remember that this is a Conservative chancellor) a historically high tax burden with further spending cuts likely, but we are dealing with an economic event which is similar to that of each of the two World Wars.

The verdict? A poll published this morning suggests that 54% of the population consider the budget to have been fair which is an unusually high rating. The budget, and the chancellor’s air of calm assurance and honest levelling in delivering it have contributed to the Conservatives opening up a substantial lead in the opinion polls which, Lord help us, is leading to some speculation about an early general election. Whether the gloss is chipped by this morning’s howls of disapproval for the suggested 1% pay rise for NHS workers remains to be seen-I suspect that one will run for a while and be followed by other pay claims from public sector key workers. A number of other elephants are galumphing about in the room, including meeting the cost of social care and the yawning gaps which have opened up in our town and city centres. I suspect that those polled are not going to be so forgiving in future years when the immediate crisis has passed. This will be the time when Mr Sunak’s ability to sustain his popular start will truly be tested.

I wouldn’t blame the chancellor for taking the opportunity to put his feet up this weekend and I hope that you’re able to find some relaxation too.

Ian Waine
Senior Partner