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Summer Economic Update commentary from Quilter

8 July 2020

If you are covering the 2020 Summer Economic Update please see the following comments from Quilter spokespeople.

Rishi Sunak has tough choices ahead after moment in the sun

Rachael Griffin, tax and financial planning expert at Quilter:

“Today’s announcement was all about spending and stimulus, with only a cursory nod to the importance of balancing public finances, which will come in the autumn. The government are keen to cast Labour as the party of ‘tax, tax, tax’, with Boris Johnson using PMQs to draw attention again to the Shadow Chancellor’s comments over the weekend about the possibility of exploring a wealth tax.

“However, if Rishi Sunak wants to balance the books and begin to repair the public finances following a huge expansion in the budget deficit, he may struggle to do so without either raising taxes or curbing tax reliefs. It means that for the time being he can enjoy a moment in the sun, with a jobs plan, giveaways to homebuyers and subsidised meals under the ‘eat out to help out’ initiative. But come the autumn the Treasury will have to confront some hard truths and the Chancellor already knows he will have to land some difficult messages later in the year.

“His team at the Treasury will be hoping that the stimulus measures announced today generate an increase in economic activity and that tax receipts from day to day activity begin to show signs of recovery. That will create some hope that growth can return us back to a more stable fiscal position. Nonetheless, it seems extremely likely that over the coming months the government will be looking at ways to increase tax revenues further once some form of economic normality has been restored.”

 

Chancellor leaves the triple lock, for now

Jon Greer, head of retirement policy at Quilter:

“The Chancellor has decided not to change the state pension triple lock in his summer economic statement, despite concerns that abnormal wage volatility next year once the furlough scheme ends will provide a considerable boost to the level of the state pension at a time when many are out of work and the government struggles to control the deficit as a result of Covid-19.

“The triple lock has worked well in reversing the relative decline in the state pension so that it has made up much of the ground it had lost relative to earnings during the 1980s and 1990s. However, as a result of Covid-19 and the government’s furlough scheme, wages are expected to fall by 3.3 per cent this year, but then bounce back next year creating a one-off spike in wage growth, increasing by 5 per cent.  

“This will increase the old-style state pension by £532.30 a year by 2022/23 and the new style state pension by £694.67 a year at a time when many will be out of work and inflation will remain low. For many, this is perceived to be untenable both in terms of its fiscal sustainability and intergenerational fairness.

“In the autumn, the government are likely to make a change to the triple lock and could temporarily amend the triple lock by uprating the state pension based on the higher of 2.5 per cent, inflation or five-year rolling average wage growth. This will smooth any abnormal wage effects whilst protecting real incomes and saving the government a considerable amount each year.

“Under this methodology, the old-style state pension will only increase by £374.88 a year in 2022/23 and the new style pension by £489.23. This is equivalent to the government saving approximately £2.2bn by 2022/23.

“Maintaining the triple lock in its current form is simply not an option. The government should use this opportunity to carefully consider the merits of moving to a long-term solution, such as a smoothed earnings link, so that pensioners share in the proceeds of economic growth, whilst protecting their income against inflation and ensuring intergenerational fairness”. 

 

Stamp duty holiday welcome but lack of mortgage deals biggest problem for first time buyers

Charlotte Nixon, mortgage expert at Quilter:

“The Chancellor has been under increasing pressure to kick-start the property market and get people moving again after the government put the brakes on the market during the lockdown. The stamp duty holiday is a welcome support measure from the Chancellor and will no doubt help make many people looking to buy their first home or move property take the plunge.

“There were concerns that if the change did not take effect immediately then it would turn a chill in the housing market into a full on freeze over the summer as buyers choose to delay completions causing a slow down while people put their moving plans on hold and wait for the holiday to come into play. The fact that the change comes into force from today is reassuring.

“However, it remains to be seen whether the holiday will boost long-term property demand, or simply front-load demand as people rush to complete purchases whilst the reduced threshold is in place.

“Buy to let investors have left the market in their droves over the last few years after tax changes have made it an untenable investment for many. The stamp duty holiday may serve to entice some of these investors back to market.

“Not only will this cut help to reignite the property market but also improve the supply of rental properties, which has been dwindling over the last 12 months. Over the last 5-10 years the government have been reforming stamp duty to remove tax burden from first time buyers and increase the tax take from landlords, having today waived stamp duty the playing field has been levelled for first time buyers and BTL investors as both are paying the same rate (nil). However, these landlords will still need to pay the 3% second home surcharge.

“Unfortunately, for many others, buying a house is out of reach. Lots of first-time buyers face a significant challenge as many lenders have pulled their 95% and 90% Loan To Value (LTV) products. This means in effect that the goal posts have been moved for these buyers as they now need to find a 15% to 20% deposit for their first home instead of just 10% or 5% prior the pandemic.

“Unfortunately, due to the poor economic sentiment at the moment lenders are being very cautious about affordability. Whether the government could support lenders with government backed products for higher LTV deals and enable more first time buyers to enter the market remains to be seen.”

 

Rishi's plan for jobs an opportunity for advice firms

Scott Stevens, head of adviser recruitment and acquisition at Quilter:

“Rishi Sunak’s package today was all about jobs. How to ensure that as we move on from the current crisis that people - particularly the next generation - have a job. Not only for the financial security it provides, but also the sense of purpose and use that comes with getting up every day and going to work. As an industry we have talked until we are blue in the face about the advice gap and how we need more advisers coming into the industry, particularly a younger and more diverse cohort. But it’s not just advisers we need, it’s paraplanners, support staff and many others.

“This government package is an ideal opportunity for the advice industry to put their hands up and say we need more staff and we are happy to get involved. Where possible advice firms should be looking for ways to use the Kickstart Scheme by setting up work placements for those aged 16 to 24 and apprenticeships for all age groups.

“More than just good practice, it will be good for business as this will showcase our profession as one for younger people to consider. Plus, we cannot deny that many entrants to the job market will not have heard of financial advice and by opening up our doors to more workers we may in turn find that we inform more people about the value that financial advice can add.”

 

Government gambling on public to spend, spend, spend

Hinesh Patel, portfolio manager at Quilter Investors:

“It is nice to see some financial policy innovation outside of the central banks as the government today chose to turn to targeted stimulus, looking to get the economy going without looking to burst the bank given where public sector debt currently is. While phase one of the plan to protect the economy came with an almighty bill, this extra £30bn may look like small fry in a £2trn economy, but the detail should not be taken lightly.

“The cut in VAT for the hospitality and tourism industries were deeper than initially briefed, and provides a template for other sectors should more support be needed in the quarters ahead. The government is gambling on the public to head out and spend, spend, spend in one of the hardest hit sectors to get the economic cycle rebooted. It remains to be seen if businesses will pocket the difference or pass-on the saving to patrons.

“Sunak also implied tough decisions will come in the Autumn in the form of a spending review. If Covid-19 cases begin to pick up again and stall the nascent recovery, this is likely to be pushed to the next fiscal year as spending and stimulus will remain key.

“However, while the picture may look relatively bleak for the immediate, the government will remain comfortable with their ability to service the debt and there is more room to expand. The Treasury and Bank of England are working hand in hand, and this should help guide the UK through this crisis.

“This is the first stage in understanding the government’s plans to withdraw the life-support machine currently propping up the UK economy. While there are still some sectors which could yet see further fiscal stimulus, namely homebuilding, industrials and green sectors, the Chancellor and the Governor of the Bank of England need to ensure their plan to exit this era of fiscal and monetary expansion does not cause the exact reaction they are looking to avoid.”

 

Richard Carter, Head of Fixed Interest Research at Quilter Cheviot:

"Rishi Sunak’s speech marked an attempt by the government to get the economy off of life-support and on to the road to recovery while trying to address fears about an impending sharp rise in unemployment.  The furlough scheme which has been running through the crisis has been very successful but it has cost the country billions and is set to be wound down in October, potentially leading to large-scale layoffs. Instead, Mr Sunak will hope that his announcements today such as the job retention bonus and the Kick Start scheme will encourage employers to keep people in work.

"There was also a number of other headline-grabbing measures designed to get consumers out of their homes and back onto the High Street including a cut in VAT for the hospitality sector and a discounted dining-out scheme. The Chancellor also confirmed an immediate freeze in stamp duty on properties up to £500,000 alongside grants for energy efficient renovations in an effort to boost the housing market.  

"Investors were watching this speech closely but there has been a fairly limited reaction as many of the announcements had already been floated in the media, as is so often the way these days. Not surprisingly, the cut in stamp duty has given housebuilder shares a lift but currency and bond markets have been largely unmoved as the measures are unlikely to be major game-changer for the economy.  

"Looking ahead, the UK faces a number of challenges. The response to the virus has been necessary but it has undone years of progress on the fiscal front. Repairing the government’s finances will take time and will need the ongoing support of the Bank of England through low interest and their QE program. Tax rises, as unpalatable as they may be, could well become necessary otherwise gilt investors may not continue to fund the government’s borrowing needs on such generous terms.  Mr Sunak expressed his desire to get the public finances back onto a sustainable footing but we will have to wait until the Autumn at the earliest for the details.

"The other challenge is Brexit. There is enough uncertainty around at the moment anyway but the government is also rapidly running out of time to agree a trade deal and future partnership with the EU. Failing to do so would risk undermining the nascent economic recovery and would likely weigh heavily on Sterling.  The Chancellor has impressed most observers during the pandemic and today was no different but he faces many more battles ahead."

 

For more information contact

Kathleen Gallagher
023 8072 6293 
079 9000 4932
kathleen.gallagher@quilter.com

Alex Berry
023 8072 6260
07741 151931
alex.berry@quilter.com

Michael Glenister
0207 7789 638  
07469 144 535
Michael.Glenister@quilter.com

Gregor Davidson
0207 7789 638
07917 522 784
gregor.davidson@quilter.com

James Ventress
020 7002 4025
07884 753 012
james.ventress@quilter.com

Notes to Editors:

Quilter plc is a leading wealth management business in the UK and internationally, helping to create prosperity for the generations of today and tomorrow.

Quilter plc oversees £95.3 billion in customer investments (as at 31 March 2020).

It has an adviser and customer offering spanning: financial advice; investment platforms; multi-asset investment solutions; and discretionary fund management.

The business is comprised of two segments: Advice and Wealth Management and Wealth Platforms.

Advice and Wealth Management encompasses the financial advice business, Quilter Financial Planning; the discretionary fund management business, Quilter Cheviot; and Quilter Investors, the Multi-asset investment solutions business.

Wealth Platforms includes Old Mutual Wealth UK platform and Quilter International, including AAM Advisory in Singapore.

The Old Mutual Wealth Heritage life assurance business was acquired by ReAssure Group Plc on 2 January 2020.

Since its IPO in June 2018, Quilter plc’s businesses have progressively rebranded to Quilter, as follows: 

  • Quilter Financial Planning (previously Intrinsic)
  • Quilter Private Client Advisers (previously Old Mutual Wealth Private Client Advisers)
  • Quilter Financial Advisers (previously Charles Derby Group)
  • Quilter Financial Adviser School
  • Quilter Cheviot
  • Quilter Investors
  • Old Mutual Wealth (becoming Quilter Investment Platform in 2020)
  • Quilter International (previously Old Mutual International)

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This communication is issued by Quilter plc.  Registered office: Millennium Bridge House, 2 Lambeth Hill, London EC4V 4AJ, United Kingdom. Registered number: 6404270.  Registered in England.