After chancellor Rishi Sunak’s spending review in late November put paid to any hopes of a ‘V-shaped’ economic recovery from Covid-19, financial advisory firm Argent Wealth, a senior partner practice of St. James’s Place Wealth Management, has warned that the road to rebuilding the economy to pre-pandemic levels is likely to be a long one.
“Our health emergency is not yet over, and the economic emergency has only just begun” was the headline statement from Sunak’s spending review, with the Office for Budget Responsibility indicating that the UK economy is set to have shrunk by 11.3 per cent over the course of 2020.
Borrowing is now at a peacetime high and the chancellor was insistent that allowing public debt to continue to escalate will not be sustainable, stressing that the strong public finances built up under successive Conservative governments was what made the levels of support provided through the crisis, thus far, at all possible in the first instance.
Sunak said: “We could only act in the way we have because we came into this crisis with strong public finances. We have a responsibility once the economy recovers to return to a sustainable fiscal position.”
The government will, in the short-term, continue to provide the financial support necessary for the UK to make it through the pandemic, with spending in 2021 set to prioritise the distribution of a working vaccine, support for firms in the private sector and a rise in the national living and minimum wage.
While news of the approval of Pfizer and BioNTech’s vaccine this week will come as a major boost, it will not work as a magic bullet to reverse the damage done to the economy even if it brings the virus itself under control, Argent Wealth warns.
Argent Wealth and St. James’s Place predict that the government will double down on the importance of reducing public debt and building the economy back up to justify tax hikes next year. This would see the Tories renege on manifesto pledges not to increase Income Tax, VAT or National Insurance, an overriding action justified by the party’s need to defend its reputation for fiscal responsibility and the requirement to rebuild the economy.
A major decision that the government must then make is who will take on the burden of increased taxes.
Technical Business Development Director at St. James’s Place, Tony Wickenden, commented: “When considering any tax reform, as well as the amount of additional tax revenue reform will generate, the chancellor will have to consider the potential impact on the economy as well as who shoulders the burden of increased taxes.
“There seems little doubt that in the coming years the importance of taxation and tax planning is going to feature strongly in the financial planning process.”
The government is not advocating a return to austerity and will instead look to introduce tax rises along with a raft of targeted spending cuts to alleviate the nation’s economic woes. Cuts have already been seen in the shape of overseas aid reductions and a pay-freeze in the public sector, which Argent Wealth and St. James’s Place have indicated will become a pay cut in real terms when inflation is factored in.
Yet, Argent Wealth and St. James’s Place expect further measures to come into force which will be needed to help reinvigorate the economy in the months and years to come, particularly with the threat of a double-pronged blow to the economy due to the ongoing pandemic and uncertainty over the outcome of the full enacting of Brexit at the beginning of next year.
An end to the pandemic not likely to come until the spring of 2021 at the earliest once vaccination programmes have begun, and should the ongoing talks with the EU not result in a trade deal, then the Office for Budget Responsibility expects two per cent of the UK economy to be wiped out next year.
With all of these factors in consideration, Argent Wealth and St. James’s Place conclude that the road ahead for the UK as it looks to rebuild its economy could be a long and challenging one.
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Argent Wealth was established by David Hardman and his father in 2009 and has since gone on to become an FTAdviser Top 100 company, advising on £200 million of funds for private clients, professionals, and business owners.
