What impact will the coronavirus bailout have long-term?
PSG Wealth Management MD, Paul Gilsenan, looks at the long-term financial impact of the Covid-19 pandemic and what relief may look like.
WIth some of the highest rates of infection in the whole of the UK, and a high percentage of the workforce employed in some of the most heavily-impacted industries, it’s fair to say that covid-19 has taken its toll on the North East in more ways than one. As shops begin to once again open their doors and talk turns to how to stimulate economies at a regional and national level, while assessing the long-term impact of government-funded economic support.
From deferring VAT and self-assessment liabilities until 2021, to a government deficit predicted to be over £300 billion, there are going to be a number of financial challenges ahead for every region of the UK.
The government primarily draws its money from taxation and the sale of gilts - borrowing from the market with the promise to pay interest and repay the capital at the end of the term. In an unprecedented move, the government recently issued £3.8 billion in guilds on a negative yield. This means that investors who hold the debt to maturity will eventually wind up with less in interest payments and capital than they paid.
This can sound overwhelming and while low interest rates can offer a glimmer of hope in the short-term, longer term is a different picture and undoubtedly providing Treasury Ministers with some sleepless nights. Inflation is one option but brings with it a host of other challenges.
So are we staring down the barrel of higher income tax and national insurance payments? Or will a VAT rise be the go-to means for raising additional revenue? This may wind up having a less than desired impact, with the public opting to simply spend less, bringing spectres of the 2008 crash aftermath and causing more problems.
Two more distant options are a return to austerity or public spending cuts that could prove a PR disaster and hurt at the polls for years to come.
The solution could come from reforms already being discussed pre-Covid, for instance some aspects of Capital Gains Tax; taxing gains in the same way as income, and removing the rebasing of assets to wipe out taxable gains on death.
Further taxation on businesses that have thrived in lockdown, such as supermarkets, is another option, along with a form of wealth tax, however putting such ideas into action on a practical level can prove much easier said than done.
The autumn budget will undoubtedly be one of the most closely followed in years and may offer the first real glimpse of what the recovery plan looks like. In the meantime, with so much uncertainty, solid financial planning and expert-planning advice will continue to play an important role in long-term planning procedures.