Budget 2020: RICS response to economic projections and coronavirus

The announcements made in today’s budget statement complement the decision from the Bank of England earlier in the day to sanction an emergency interest rate cut and implement measures designed to support lending to businesses. Together, they reinforce expectations that the UK economy will likely face significant near-term disruption stemming from the Covid-19 outbreak in the coming months.

Even before the escalation of the coronavirus epidemic, a sluggish global economy had looked likely to act as a further headwind for the UK which was already struggling for momentum. As such, Chancellor Rishi Sunak was inevitably going to be faced with a challenging set of macro assumptions. The Office for Budget Responsibility (OBR) pencilled in a growth forecast for this year of 1.1 per cent, down from a projection of 1.4 per cent in the previous forecast. However, given the fears about the spread of coronavirus the risk looks to be skewed somewhat towards the downside even with the support measures being put in place.

Forecasts for subsequent years are not surprisingly more upbeat with growth anticipated to rebound to 1.8 per cent in 2021 (slightly above the 1.6% projected previously) before easing to 1.5 per cent in 2022 and 1.3 per cent in 2023 (down from expectations for 1.6 per cent growth in both cases beforehand). Nevertheless, the chancellor was keen to point out that, without the package of fiscal stimulus measures the medium-term outlook would have been noticeably weaker.

The budget package shows a significant shift towards an easing in fiscal policy even without the additional £12bn of virus-related spending. The underlying shift in policy for the remainder of this year is broadly neutral but then jumps to £18bn next year and £36bn in 2021-22. Inevitably a large part of this boost is covered by an uplift in public borrowing although the decision to maintain corporation tax at 19 per cent provides support to government revenues (£4.5 and £6bn respectively over the next two years).

Within the spending allocation, the numbers imply a significant increase in the provision to capital investment. The chancellor did announce a review of the fiscal rules designed to manage the overall budget but was able to avoid breaking the framework set by his predecessor, at least in part, because the OBR maintained a relatively upbeat view on the trend rate of growth – notwithstanding the downgrade for the coming year.

In terms of what this means for real estate sector, the emergency measures to support the economy over the coming months will be, to some extent, helpful in underpinning the commercial and residential markets although it is still hard to believe that activity won’t be hit if the virus spreads. The confirmation of the tax on overseas buyers doesn’t take effect till next year so will not have an immediate impact.  But, housebuilders are likely to be mindful that with the virus already dissuading foreign buyers and Help to Buy set to expire, there is a strong case for them managing the future development pipeline cautiously leaving the 300,000 new home target someway off. The one potential support could be the announcement of the new Affordable Homes Programme. Although there was little detail beyond the headline figure, the reference to home ownership implies that the first homes initiative may be part of this package.