The UK budget: time to throw caution to the wind?
06 March 2020
5 minute read
By Jai Lakhani, London UK, Investment Strategist
The UK budget in March may be a trailblazer in the shift towards more fiscal spending, and away from monetary policy, that is underway around the world. How much will the new chancellor flex his muscle?
After ten years of painful spending cuts and austerity, the budget on 11 March is set to provide some fiscal relief to an economy that, arguably, needs such support.
However, the size of fiscal injection, if rules will be put on spending pledges and where spending will occur, is uncertain.
Driving this uncertainty was originally Prime Minister Boris Johnson’s February cabinet reshuffle and the departure of Sajid Javid as chancellor. Javid is a fiscal hawk whose desire for a strict rules-based approach to balancing the books appeared at odds with the prime minister.
Adding to the ambiguity has been the outburst of the coronavirus and its detrimental effect on financial markets. This could result in new chancellor Rishi Sunak arguing for more fiscal discretion given unusual circumstances.
Moderate discretion and delayed rules-based approach
Such an option is arguably justifiable in light of low interest rates, subdued inflation and a supply-side shock from Covid-19. Sunak can now use discretion to relax rules, such as ensuring the budget is balanced or in surplus, in five years’ time as opposed to in three years.
However, this is a significant break from the norm and its necessity will be questioned given that the current budget as it stands is balanced.
Another option, which appears the most attractive in terms of satisfying the need for fiscal discipline and ensuring chancellor Sunak’s independence, is to commit in areas affected by the virus and provide little elsewhere, with the opportunity to do so at the Autumn budget.
The budget usually happens in Autumn with the March budget this year a result of no Autumn budget last year. Assuming the current Brexit timetable, Sunak will have a much clearer idea of the type of post-Brexit relationship between the UK and European Union and the underlying momentum of the domestic and global economies. Not to mention a much clearer idea on containment of the virus.
Levelling up
While the size of fiscal stimulus remains open to question, an end to austerity for now is reason to cheer and is likely to have a material impact on the UK economy. This will be especially so if the government invests in areas with the highest gross domestic product multipliers, such as spending on health (almost inevitable given the outbreak) and police and investment in public construction focused on “levelling up” disadvantaged regions.
Fiscal spending gains converts
In our Outlook 2020, we anticipated that there would likely be a move towards fiscal stimulus globally given that it has long been required and central banks are running out of room to support the economy. It has been a talking point in the world’s largest economy, with the Democrat party announcing a $760bn infrastructure plan.
While any action will most likely follow the election and any bipartisan initiative may be smaller in scale, the topic of fiscal expenditure is here to stay.
The Covid-19 outbreak might be the catalyst for governments around the world to start spending more to support the economy
As is potentially the case in the UK, the Covid-19 outbreak might be the catalyst for governments around the world to start spending more to support the economy. Hong Kong, Italy and China have already announced fiscal measures aimed at supporting their economy in the wake of the virus outbreak.
Investments can fall as well as rise in value. Your capital or the income generated from your investment may be at risk.
This document has been issued by the Investments division at Barclays Private Banking division and is not a product of the Barclays Research department. Any views expressed may differ from those of Barclays Research. All opinions and estimates included in this document constitute our judgment as of the date of the document and may be subject to change without notice. No representation is made as to the accuracy of the assumptions made within, or completeness of, any modeling, scenario analysis or back-testing.
Barclays is not responsible for information stated to be obtained or derived from third party sources or statistical services, and we do not guarantee the information’s accuracy which may be incomplete or condensed.
This document has been prepared for information purposes only and does not constitute a prospectus, an offer, invitation or solicitation to buy or sell securities and is not intended to provide the sole basis for any evaluation of the securities or any other instrument, which may be discussed in it.
Any offer or entry into any transaction requires Barclays’ subsequent formal agreement which will be subject to internal approvals and execution of binding transaction documents. Any past or simulated past performance including back-testing, modeling or scenario analysis contained herein does not predict and is no indication as to future performance. The value of any investment may also fluctuate as a result of market changes.
The value of any investment may also fluctuate as a result of market changes.
Neither Barclays, its affiliates nor any of its directors, officers, employees, representatives or agents, accepts any liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this communication or its contents or reliance on the information contained herein, except to the extent this would be prohibited by law or regulation..
This document and the information contained herein may only be distributed and published in jurisdictions in which such distribution and publication is permitted. You may not distribute this document, in whole or part, without our prior, express written permission. Law or regulation in certain countries may restrict the manner of distribution of this document and persons who come into possession of this document are required to inform themselves of and observe such restrictions.
The contents herein do not constitute investment, legal, tax, accounting or other advice. You should consider your own financial situation, objectives and needs, and conduct your own independent investigation and assessment of the contents of this document, including obtaining investment, legal, tax, accounting and such other advice as you consider necessary or appropriate, before making any investment or other decision.
THIS COMMUNICATION IS PROVIDED FOR INFORMATION PURPOSES ONLY AND IS SUBJECT TO CHANGE. IT IS INDICATIVE ONLY AND IS NOT BINDING.