Market Loop - 🎉Budget bonanza

ECONOMY
Budget Day overview 

What’s going on?
The Chancellor announced that all government departments would see spending increases totalling £150bn by 2024-25, the largest increase in over 20 years.

Why is this important?

The government is turning on the spending taps after economic growth forecasts were upgraded and the impact of the pandemic is not as bad as previously thought. 

Key announcements from yesterday include:

A stronger economy gives the Chancellor freedom to increase spending as tax revenues will be higher and benefits will be lower. 

Increasing tax rates is also another way to fund growing spending but these announcements came earlier in the year. 

In the March Budget the government revealed that corporation tax would rise from 19% to 25% in 2023 and that income tax and capital gains tax thresholds would not rise. Then last month it was announced that national insurance contributions would increase next year. 

Takeaway
This budget has been billed as good news for low paid workers, drivers and prosecco drinkers. The Chancellor has been generous in spending but the tax rises on the way mean that the proportion of tax paid, known as the tax burden, is 36% - highest since the 1950s.

ECONOMY
UK economy recovering stronger than expected 

As mentioned above, the increase in government spending has been funded by the uplift in growth forecasts for the UK economy from the Office for Budget Responsibility (OBR).

The OBR gives independent analysis of the UK's public finances and its GDP, unemployment and inflation forecasts are used by the government to assess how much cash will be available to spend.

Earlier in the year the economy was expected to grow by 4% in 2021 but this has been upgraded to 6.5%. GDP is forecast to return to pre-Covid levels by the end of next year. The OBR has also downgraded its unemployment forecast from 12% down to 5.2% as the pandemic has not hit the economy as hard as previously feared.

All this means that the economy is expected to generate higher tax revenues, freeing up around £35bn a year for the government to spend.

Another upshot of the revised OBR forecasts is that the government will have to borrow less. Borrowing estimates has been lowered from 10.3% of GDP to 7.9% this year and falls to below 2% from 2023-24.

The OBR forecasts will be a dream for the Chancellor. The extra funds generated by a stronger economy will be used to invest in public services, provide some tax relief to stressed parts of the economy and cut government debt.