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Wealth Managers Weigh Chancellor's Latest Package

Editorial Staff, 25 September 2020

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Reactions below from wealth managers and economists on the wage subsidy and other measures being introduced, their likely cost to the Treasury and effects on sterling and markets.

With an Autumm budget scrapped and the pandemic sending the UK into a second wave of hardening restrictions, UK Chancellor Rishi Sunak yesterday set out what the next stage of government support will entail as existing schemes wind up in October.

One of the more detailed assessments of the package came from David Page, head of macro research at AXA Investment Managers

Jobs Support Scheme
"This is modelled on the short-time work schemes used more broadly across the continent. It will be active for six months from November, as the current furlough scheme ends and it will provide subsidies to firms to top-up workers’ wages to two-thirds of their level, so long as they work – and are paid normally – for a minimum of one-third their usual amount. The scheme will apply to all SMEs but only to large firms that have seen a material fall in turnover. Firms do not need to have been part of the furlough scheme to take part. Firms can claim for both the new scheme and the Jobs Retention Bonus at the same time. The scheme will also be extended to the self-employed.

Extending the terms of previous borrowing arrangements
The Chancellor is introducing a “pay as you grow” allowance to its £38 billion Bounce Back Loans agreement, extending loan repayments to 10 years from six years, it will also allow for interest-only payments and for those in real trouble allow a six-month holiday. The CBILS loans will also see an extended loan guarantee up to 10 years. Both schemes will be open until the end of this year.

Extend the deferral of VAT payments
This will be extended from the end of March 2021, across the whole of next year over 11 smaller installments.

Extended VAT cut to the hospitality and tourism sector
The cut to 5 per cent (from 20 per cent) will be extended until the end of March from 13 January.

The impact of all these measures to ease cash flow concerns for business, with the extension of payments for loans and VAT deferrals, will be vital in what looks set to be a tight period for many businesses. Moreover, the deferral of the VAT rate cut date will also push back something that could have added further headwinds to the ailing hospitality and tourism sector. However, we think the most significant policy will be the Jobs Support Scheme. This subsidisation of employment in vulnerable sectors should reduce the number of people who are likely to lose their jobs over the coming months as the furlough scheme ends. However, with the new scheme purposefully not trying to support all previous jobs, we are still likely to see a material increase in the unemployment rate over the coming months.

The cost of these measures is as yet unknown. The real cost of the extension to loan repayments and VAT deferrals is likely to be small, not least as these extensions should increase the chances of ultimately receiving these repayments.

Also the extension of the VAT cut to the hospitality and tourism sectors is also likely to be relatively small, we estimate at just over £1 billion. But the Jobs Support Scheme is again likely to be the most significant and, while this should fall short of the estimated £75 billion cost of the furlough scheme, including the self-employed component, it could still prove significant.

Friday sees the release of August’s public sector finances, which are expected to take the total borrowing this financial year to nearly £200 billion (9.4 per cent of GDP), with the total government debt rising above £2 trillion (94 per cent of GDP).

While we expect the pace of the deficit increase to slow over the coming months, the outlook for the financial year total remains eye-watering.

In all, these measures will help mitigate some of the renewed headwinds to UK activity outlook, although after a buoyant summer we expect a much slower pace of growth across the fourth quarter. The Chancellor has scrapped his Autumn Budget. We continue to believe that the next Budget will see the Chancellor provide additional fiscal support; we will hope that he can focus on longer-term growth drivers by this time, as opposed to ongoing short-term support. However, financial markets appeared underwhelmed by today’s statement, 2-year gilt yields were 1bp lower at -0.06 per cent and 10-year yields fell 2bps to 0.20 per cent. Sterling also fell by 0.25 per cent on the announcement against both the euro and the US dollar.
 
Matthew Cady, Investment Strategist at Brooks Macdonald:
“The UK Chancellor has today bowed to pressure from businesses as well as the governor of the Bank of England Andrew Bailey, to support jobs with a new package of measures after the current furlough scheme is due to finish at the end of October.
 
What it mean for markets
"The watch-word for policy makers during the coronavirus pandemic has been co-ordination. While monetary policy or fiscal policy can each in isolation provide support, it is the co-ordination between the two which has proved to be that much more effective in delivering a pressure-release-valve for both economies and markets alike.
 
The view from Brooks Macdonald
"While today’s support from the government is clearly welcome, the new jobs package does look somewhat less generous than before. Under the new plan, with the government paying one-third of two-thirds wages not earned, this equates to 22 per cent of a person’s total wages. That means that from the beginning of November, a company would pay a minimum of 55 per cent, and the government a maximum of 22 per cent. For the government, this is less than under the furlough scheme, which at the start saw the government paying up to 80 per cent. Nonetheless, with today’s fiscal actions, the government has passed the policy baton back to the Bank of England, where markets continue to hope for additional accommodation before the end of the year."

Mohammed Kazmi, fixed income portfolio manager at UBP:
“Chancellor Sunak’s speech provided no surprises given expectations of today’s announcement. The question is whether the package of schemes provided will be able to manage the inevitable rise in unemployment that is due when the furlough scheme ends at the end of October.

"With many of these schemes are yet to be fully tested, given the unprecedented nature of this shock, growth risks remain skewed to the downside, especially when considering Brexit uncertainty and the new UK lockdown measures that have been implemented.

"As such, we see a continued likelihood that the BoE will have to ease further before year-end, most likely through an expansion of their asset purchase programme. Whilst not imminent, we can also see a scenario in which the BoE does take interest rates negative after the new year, particularly if a Brexit deal cannot be reached. For these reasons we could see UK gilts outperform German Bunds in the near term, this is also given that the main easing measures from the ECB appear to have passed for now.”

Daniele Antonucci, chief economist and macro strategist at Quintet Private Bank (parent of Brown Shipley)
“The measures announced by the Chancellor are supportive for workers and businesses across the UK. They mitigate the risk of the ‘cliff edge’ many businesses would have faced if the current job retention scheme was not replaced with alternative policies.

"But many of these measures, such as the extension to the VAT cut, remain temporary to avoid weighing on the public finances to a great extent. As the virus outbreak is spreading again and containment measures are taken, activity is likely to slow in the coming months. With a vaccine break-through and better therapeutics still in development, we’ll likely need to see further fiscal support.”

Julian Jessop, economics fellow at the Institute of Economic Affairs:
"The new wage subsidy scheme strikes a reasonable balance between tiding companies and workers over a brief period of additional restrictions and uncertainty, while still incentivising firms to let people go and workers to find new jobs, if there is little prospect of them returning to full-time employment in their current role.

"Nonetheless, there are still plenty of concerns – including the ongoing cost of the scheme, the additional bureaucracy, and the potential for fraud and mistakes.

"It would be preferable to have a more targeted approach, whether based on geography or sector.

"This could also have been achieved in other ways, rather than subsidising short-time working. The money might have been better used to support the incomes of those who will still lose their current jobs and by helping the unemployed back into new ones."

Glyn Woodhouse, VAT partner at BDO:
“We welcome the extension to the lower rate of VAT for the tourism and hospitality services (which was due to end in January 2021) until the end of March 2021 and also the ability to spread the payment of the VAT that was deferred between March to June 2020.

"These measures are extremely helpful for business and help prevent the “cliff edge” that had previously been created. However, January to March are relatively quiet months for the tourist and hospitality sector and many businesses in that sector will have been hoping that this could have been continued through the summer.”

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