RICS Budget 2021 Response

Christian Cubitt, Head of Government Affairs, UK & Ireland said:

With the country finally able to begin looking beyond COVID-19 thanks to the vaccination programme, this budget delivers the incentives needed that will help build our way toward economic recovery. The Chancellor is absolutely right to use the full ‘fiscal firepower’ available to him to support businesses and families across the UK.

The extension of the furlough scheme, combined with new grants for small businesses and further support for the self-employed, are extremely welcome measures which will give many firms the best possible chance of emerging from the pandemic with jobs intact. For those that have lost their jobs, in particular young people, the commitment to increase funding for skills and support for apprenticeships is very welcome. Apprenticeships have proved an important route into this profession for many from a range of diverse backgrounds and we continue to champion them.

This focus on the big picture is right and it is essential for all RICS professionals that we have a strong functioning economy. The Chancellor was also upfront about where some of the future pain would come as the huge borrowing spree that the Government has been on will have to be paid back. The decision to not raise the threshold for income tax was expected, as was the commitment to raise corporation tax in time. These measures will help start to balance the economy again and it is important that businesses and families know what their impact will be and when that will be felt so they can plan accordingly.

Let us consider what else was in the Budget within our key areas here in the UK: housing; town and city centre regeneration & renewal; and sustainable construction and infrastructure

1. Housing

Ensuring we have decent homes where people want to live is essential to creating sustainable thriving communities. The mortgage guarantee scheme will help buyers get a home of their own, especially those who have seen their personal finances hit by the pandemic.

The tapered extension of the stamp duty holiday will also help all those currently trying to buy and sell their homes. Though what we really need to see, and what RICS has been calling for, is a full and thorough review of all property taxation. We will also continue to call for a VAT cut for builders looking to retrofit existing homes – an important step in really helping to deliver a greener Britain.

2. Town and City Centre Regeneration and Renewal

The announcement of a £5bn scheme to support high street businesses is to be welcomed, as it will support a number of smaller independent businesses to survive. Extending the business rates holiday and discounting these costs for the rest of the year is another positive step, particularly for small business that have arguably been hit hardest by the global pandemic.

High streets have traditionally played an important role as the heart of our communities, in towns and cities across the UK. The impact of the pandemic has hit them hard, and exacerbated structural changes that were already in evidence. Moving forward RICS professionals will work with the Government to think big about how we can really reshape our town and city centres – understanding the changing nature of retail businesses and commercial office space and how we can utilise vacant space for much needed high quality residential property – to ensure they remain thriving vibrant urban centres.

3. Sustainable Construction and Infrastructure

From getting thousands more young people onto the housing ladder to breaking ground on transformative projects backed by a new UK Infrastructure Bank, the billions invested represent a shot in the arm for the sector and the levelling up agenda. The UK Infrastructure Bank’s focus on green construction is particularly good news which will encourage investment in projects and programmes that will drive sustainability. RICS professionals have experience and expertise in this area and can support this to be a success.

The £1bn investment into 45 new Town Deals across England with a focus on innovative green industries will help level up communities that have too often been left behind in the past. Similarly in Scotland the funding for the three growth deals, the £27 million in the Aberdeen Energy Transition Zone and £5 million in the Global Underwater Hub are all positive steps forward, as is the news that three City and Growth deals in Wales will receive funding more quickly, and that almost half of the £400 million New Deal for Northern Ireland funding has been allocated, subject to business cases, to new systems for supermarkets and small traders to manage new trading arrangements; building greater resilience in medicine supply chains; promoting Northern Ireland's goods and services overseas; and supporting skills development.

Finally the announcement of the Freeports initiative is to be welcomed. If delivered properly with real thought and genuine investment they have the opportunity to unlock jobs and opportunities with associated work in construction and infrastructure that RICS professionals can support.

Simon Rubinsohn, RICS Chief Economist commented:

Given the unpredictability of events over the past twelve months, economic forecasts have been subject to larger and more frequent revisions than would be customary of late. Although the changes to the Office for Budget Responsibility (OBR) projections today were much less dramatic than the extensive revaluation of the UK’s economic outlook between the March 2020 Budget and the November update, there were still some significant adjustments nonetheless. Largely owing to the current lockdown measures in place, weaker GDP growth of 4% is now expected in 2021, compared to 5.5% forecast back in November. More positively however, economic growth forecasts for 2022 were revised up to 7.3% (from 6.6% in November), with the UK economy now anticipated to recover to its pre-COVID level by the middle of next year, two quarters earlier than expected last November. That being said, growth projections were downgraded slightly in each subsequent year through to the end of the forecast horizon, standing at 1.7% in 2023, 1.6% in 2024 and 1.7% for 2025.

The Chancellor was keen to highlight the success of the furlough scheme (now extended until September) in protecting jobs, and the fact that the OBR now expects unemployment to peak at 6.5%, as opposed to their earlier estimate of 7.5%, would support that view. The scheme, coupled with all other measures introduced in response to the pandemic, brings the total spent on COVID support to £352bn. Going forward, government borrowing is now forecast to total just shy of £234bn in the 2021-22 financial year, much higher than the £164bn expected by the OBR back in November. Similarly, borrowing forecasts have also been adjusted upwards for 2022-23, albeit slightly, to £106.9bn from £104.6bn previously projected.

Crucially though, there has been a noteworthy reduction in borrowing forecasts in each remaining year through to 2025-26. Indeed, borrowing in 2023-24 is now envisaged to come in at £85.3bn (vs £100.4bn previously expected), for 2024-25 borrowing projections stand at £74.4bn (down from £99.6bn back in November), while £73.7bn of borrowing is anticipated in 2025-26, much lower than the £101.8bn expected beforehand. The OBR attributes £43bn of the expected reduction in borrowing in the latter part of the forecast directly to policy changes unveiled today, with the scheduled rise in corporation tax in 2023 (from 19% to 25%), and the freezing of the tax free income allowance after next year, both contributing significantly. It is moreover likely that further measures will at least be put out for consultation in due course as the Chancellor seeks to create greater room for manoeuvre on policy in the future.

As far as the housing market is concerned, the widely trailed extension of the stamp duty holiday (supplemented by a tapering of the tax break) allied to the mortgage guarantee scheme is likely to give a further modest boost to both residential prices and activity over the coming months. The OBR recognised this in its analysis while still projecting a modest decline in prices in 2022. That said, against a backdrop of cheap mortgage finance, a smaller rise in unemployment than previously envisaged and a continuing undersupply of new homes the risk is that prices will once again surprise on the upside. That may be viewed with some relief by some existing homeowners but  raises ongoing questions around affordability more generally even if we do now see an increased number of mortgage products coming to the market at higher loan to values.

For the commercial market, the OBR numbers are consistent with a flatter trend in pricing (after recent declines) over the next few years albeit that transactions are anticipated rebounding through the remainder of this year. Inevitably this masks significant sector divergences with some of the big structural changes continuing to heavily influence market performance. Forward looking indicator from the latest RICS survey remain particularly cautious on physical retail and notwithstanding the encouraging initiatives announced by the Chancellor around the high street and new town deals, the direction of travel in this area is unlikely to change materially.