Britain announced its Spring budget on March 6, 2024. People are excited because there’s going to be an election soon. Finance Minister Jeremy Hunt has a tough job ahead. He needs to balance making the economy grow and giving things away with dealing with the country’s high debt and inflation.
Back in July 2020, the government had a special offer on stamp duty. This made families want to move to bigger houses. There’s also a program called Help-to-Buy. It helps people buy their first homes. But these housing policies have both good and bad effects.
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People are hoping for tax cuts and more help with housing. But they’re worried about doing too much too fast. If the government is too generous, it could make investors sell their UK bonds. This would make inflation even worse. It’s a big problem for the Bank of England, which is already dealing with very high-interest rates.
Income Tax Cuts, Electric Cars, and Inflation on the Table
The March 6 budget holds the promise of reshaping the market landscape, with both winners and losers emerging in its wake. In the face of a stagnant UK economy, the pound’s fate hangs in the balance. While growth initiatives could elevate the currency, fears of government over-spending threaten to undermine its resilience, caution analysts.
Jeremy Hunt, eager to establish a reputation for fiscal prudence following the market turbulence caused by his predecessors’ under-funded 2022 ‘mini-budget’, faces mounting pressure to enact income tax cuts. Industry voices advocate for additional measures, including tax reductions for electric cars, a freeze on fuel duties, and an extension of business rates relief for retail and leisure sectors.
The potential for a generous budget raises concerns about inflation. Peter Doherty, Investment Director at private bank Arbuthnot Latham, warns of this inflationary impact, stating that it could “push back rate cut hopes” and fortify the pound’s resilience.
Sterling’s recent performance, boasting a 5% gain against the dollar in the past year, is not solely attributed to rate forecasts. The Institute for Fiscal Studies, a reputable think tank, issues a cautionary note. They highlight that promises to fund immediate tax cuts with “unspecified future spending cuts” might erode the government’s credibility, posing a threat to UK assets, including the sterling. As the fiscal stage is set for a pivotal announcement, the intricacies of economic dynamics and political strategies converge in a climax of uncertainty.
As the specter of UK public debt looms, creeping towards 100% of national income, the eagerly awaited Wednesday’s borrowing forecasts are poised to confirm what has been anticipated – a deluge of new bond sales. Deutsche Bank forecasts a staggering £271 billion ($340 billion) in gilt sales for the upcoming financial year, a significant surge from the current year’s £237 billion. NatWest Markets’ Chief UK Economist, Ross Walker, underscores the enormity of the supply, emphasizing its substantial persistence over the medium term.
Public Debt and Borrowing Forecasts:
- UK Public Debt nearing 100% of National Income
- Expected Bond Sales (£271 billion) – Deutsche Bank
- NatWest Markets’ Perspective on Supply
Debt to Hit 8% of National Income
The aftermath of November’s budget saw a sell-off of gilts as bond-sale plans surpassed expectations, leaving investors grappling with the implications. The Institute for Fiscal Studies (IFS) predicts a record increase in private sector holdings of UK debt in 2024-2025, soaring to almost 8% of national income. A considerable portion of gilts is set to mature this year, necessitating replacement, just as the Bank of England is unwinding bonds from its emergency purchase schemes.
Against this backdrop, UK 10-year gilt yields, inversely related to prices, have surged 70 basis points this year to 4.25%, outpacing the 45 bps increase in both US and German yields. Jason Simpson, Senior Fixed Income Strategist at State Street’s SPDR ETF business, notes cautious neutrality among investors towards gilts ahead of the budget, mitigating the risk of a bond sell-off compared to scenarios where managers had already heavily invested in UK debt.
The financial landscape further reveals UK stocks trailing, with the FTSE 100 index 5.5% below its previous year’s zenith, while European equities break record highs. The exodus of over $36 billion from UK equity funds in 2023, the largest since at least 2008, underscores a need for Finance Minister Jeremy Hunt to stimulate investment in UK equities, a market largely forsaken by domestic pension funds over the last decade.
As the budget looms, tobacco giants like British American Tobacco and Imperial Brands find themselves under scrutiny, amid whispers of a vape tax. Susannah Streeter, Head of Money and Markets at Hargreaves Lansdown, assures that any share impact should be minimal, given the anticipated tax is already factored into prices.
Bond Market Impact:
- Gilts sell-off after budget.
- Bond-sale plans surpass expectations.
- IFS predicts a record increase in private sector holdings of UK debt (2024-2025).
- UK 10-year gilt yields surge to 4.25%, outpacing US and German yields.
Winners and Losers in the Housing Policy Arena
The removal of interest-rate relief on buy-to-let mortgage repayments, coupled with an additional three per cent stamp duty on second homes, triggered a mass exodus of private landlords from the sector. This departure led to a drastic reduction in available properties for tenants in London, consequently propelling rental prices to new heights. Simultaneously, the absence of a comprehensive national council house-building strategy has exacerbated homelessness and temporary accommodation crises in the capital.
James Bailey, UK housing leader at PricewaterhouseCoopers, asserts that housing has become a key focal point in the race for political power. Against this backdrop, the looming question is what groundbreaking announcements can be expected from the Chancellor, and who will emerge as winners or losers in the aftermath of the spring Budget?
With first-time buyers currently exempt from stamp duty on properties up to £425,000 (set to drop to £250,000 in March 2025), calls for stamp duty reform intensify. Rightmove underscores the regional disparities, noting that only four percent of homes in London are stamp duty-exempt for all buyers, compared to a substantial 71 percent in the North-East.
In this high-stakes narrative, the winners emerge as upsizers already on the property ladder seeking relocation or larger homes for growing families. On the flip side, future generations may find themselves grappling with surging house prices once again.
99 per cent mortgage guarantees ‘will not move the dial’
The Government’s commitment to a 95 percent loan-to-value mortgage guarantee, initially outlined in its 2019 manifesto, is now being tested with a more ambitious 99 percent version, requiring only a one percent deposit from buyers. Despite Treasury underwriting, this development unnerves banks operating in an already uncertain lending environment.
Lucian Cook, Head of Residential Research at Savills, casts doubt on the effectiveness of this initiative, stating, “It addresses deposit affordability but not mortgage affordability. It doesn’t move the dial.” The scheme, while designed to enhance deposit affordability, falls short of stimulating sufficient demand to incentivize housebuilders to significantly increase housing construction, failing to fill the void left by the conclusion of Help to Buy last year.
Stock Market Dynamics:
- UK stocks trailing, FTSE 100 index 5.5% below the previous year’s peak.
- European equities breaking record highs.
- Over $36 billion withdrawn from UK equity funds in 2023, the largest since 2008.
As Jeremy Hunt prepares to address the young voter demographic in this Budget, the focus is expected to extend beyond the core homeowner base of the Conservatives. Rental growth in London, though slowing, is projected to rise by 5.5 percent in 2024. The potential inclusion of an update on the Renters Reform Bill to curb no-fault evictions is under consideration. Winners in this complex landscape include small landlords relying on property income, young professionals seeking more choices and lower rents, as well as homeless families living in substandard conditions due to a shortage of affordable housing. Conversely, London stands to lose, with potential outflows of tenants, key workers, and talent seeking more affordable living arrangements in commuter belt areas or regional cities if meaningful actions are not taken.
