Debt, it’s a pretty major topic these days, all the more so after the recent interest-rate rise. Now the budget has been released, it’s interesting to think about what it means for debt and those who carry it.
Private consumer debt
An increase in the National Living Wage and increases both to the personal allowance for income tax and the threshold for the higher rate should certainly help people in work to finance consumer debt. The issues surrounding the rollout of Universal Credit still leave open a number of questions regarding how people on lower incomes or without income will manage personal consumer debt and only time will tell when and how (or indeed if), these will be resolved.
The above comments all apply to those with existing mortgage debt, however, for those looking to take on their first mortgage, the situation is rather more complicated. The chancellor’s decision to slash stamp duty for first-time buyers and to extend the help-to-buy scheme may have the result of making mortgages more affordable for new home buyers by lowering the overall, upfront costs of buying a home. Alternatively, they may wind up backfiring and simply stoking the housing market. Even if it is assumed that Philip Hammond has tilted the playing field in favour of first-time buyers through his actions in cutting stamp duty for them, while levying a surcharge on buy-to-let landlords, the end result of this may simply be to increase competition amongst first-time buyers, thereby leading to house-price inflation. What’s more, if the imbalance between first-time buyers and buy-to-let landlords reaches the point where the latter start to exit the property market in significant numbers, the reduction in supply of rental accommodation could lead to an increase in rents, thereby making it harder for would-be first-time buyers to save up for the deposit they will need to get a mortgage in the first place.
Annual government borrowing was £8.4bn lower than the March forecast, coming in at £49.9bn. According to government forecasts, borrowing will peak this year a 86.5% of GDP and reduce, albeit slowly, over the next five years to reach 79.1% of GDP in 2022-2023. Public-sector borrowing specifically is forecast to fall to 2.4% of GDP this year (from 3.8% of GDP last year) and then to reduce, slowly, each year until it reaches 1.1% of GDP in 2022-2023. While all this seems positive, it has to be noted that projected borrowing has been revised upwards for the fiscal years 2019-2020 to 2021-2022 (inclusive) due to concerns about the economic outlook and its impact on tax revenues. The chancellor reduced the growth forecast for 2017 from 2% to 1.5% and forecast even lower growth in 2018 and 2019 (1.4% and 1.3% respectively) before the economy started to pick up again in 2020 and 2021 (with 1.5% growth and 1.6% growth respectively). In particular, the forecast for productivity growth has been reduced to an average of 0.7% a year from now to 2023. On the plus side, Philip Hammond expects inflation to fall towards its 2% target later this year and has forecast that there will be another 600,000 people in work by 2022.
Although not a debt as such, it is highly likely that Brexit will lead to some degree of extra expense. The chancellor certainly thinks so as he has set aside a £3bn “Brexit chest” to cover all eventualities. Having said this, the money does not come close to the £20bn to £30bn being touted as a possible divorce settlement.