Hammond plays it safe
Chancellor Philip Hammond delivered a politically adept Autumn Budget on Wednesday 22nd November 2017, having learned lessons from the U-turn required after the last Budget announcement of major changes to National Insurance Contributions for the self-employed.
On behalf of a government which has no clear majority in Parliament and has been suffering from fractious infighting since the beginning of the Brexit negotiations, Hammond steered a safe course through this Budget.
He consistently emphasised the long term issues of the UK economy and how this Budget would address these, but in reality this was a Budget focused on the political short-term.
Hammond did not have enough in the war chest built up after the last Budget to spend much on addressing the long-term problems of the UK economy, without resorting to substantially higher borrowing and risking a U-turn on his fiscal goals. The announcements are designed to look like giveaways at best and no change at worst, appealing to voters and critics of this government. Some are no more than ‘hot air’, unlikely to have any impact.
There is a serious downside to this type of ad hoc policy creation. Existing policies become more complex, less targeted and the chances of damaging consequences for individuals, markets and the economy increases.
Productivity and Economic Growth forecasts
The issue of productivity hanged over the entire of the Budget following the Office for Budget Responsibility’s (OBR) downgrade in the productivity growth rate used in forecasts. In each Budget since the 2008 crisis, the OBR had optimistically assumed that productivity growth would return to the ‘normal’ pre-crisis levels; instead, productivity growth stalled. Adopting the revised figure of 1% productivity growth has slashed economic growth forecasts even lower than the gloomier previous ones – to an average of above 1.8% to an average of 1.4% per year between 2017 and 2022.
As a result, the Chancellor duly confirmed measures aimed at boosting productivity – investment in infrastructure (1.7bn in transport in England, £500 million in 5G networks), education and skills (teacher training, artificial intelligence and driverless cars technology) and R&D (£2.3 billion).
Impact on Public Finances
With the benefit of the improved fiscal performance over the past year, and despite the downgrade in economic growth, the overall trajectory of the public finances will remain – budget deficit continuing to fall and debt reaching a peak in 2017-18 and then falling. Nevertheless, instead of balancing the books at the start of the next Parliament, the government now expects a deficit of 1.5% (around £30bn) in 2020/21.
On the government revenue side, acknowledging that lower productivity growth rates are here to stay has downgraded future GDP growth forecasts, which will make balancing the books and meeting the debt target harder. Lower growth would lead to lower tax receipts, raising the need to borrow more and, thus, adding on the existing debt; with slower GDP growth and debt pay-down, debt will fall slower as a percentage in GDP. On the government expenditure side, little could actually be done on the hot-spending areas like NHS and public sector pay.
Instead, the Chancellor made politically-astute giveaways to the devolved regional governments (£2 billion for Scotland, £1.2 billion for Wales and £650 million for Northern Ireland) and set aside £3 billion in preparation for all possible Brexit outcomes.
Impact on Household Finances
Given the gloomy economic growth outlook, the recent rise in inflation, the persistent decline in real earnings and the fall in consumer confidence, the Chancellor was at pains to show that ‘no-one-loses’ with this Budget.
For low income households, he addressed operational issues in universal credit and increased the National Living Wage above inflation (4.4%). For private sector households, where there has been some wage growth, he increased the personal allowance and income tax threshold in line with inflation. Further specific measures affecting households and businesses are discussed below including housing, duties and business rates.
Fixing Housing Markets
The headline announcement in the Budget was the scrapping stamp duty for first time buyers on the first £300,000 of purchase price. In high price areas, this could mean savings of £5,000 for some first time buyers.
There are good reasons for scrapping all stamp duty on housing because this tax reduces the number of housing transactions (see this report from the Institute for Fiscal Studies), but this ad hoc change will have unintended consequences.
In areas with housing in short supply, first time buyers will use the windfall to raise offers, increasing prices and value to existing home owners, and in areas where people don’t want to buy, no one gains.
The woes of the housing market cannot be fixed without more radical changes in planning conditions which limit supply. The Chancellor was keen to promote his target of 300,000 new houses each year within a decade with £44 billion of ‘hot air’ guarantees and support which may never be spent.
He announced £400 million for improvements on housing estates which sounds good, but keep it in perspective. If £28 million is sufficient for providing services for victims of the Grenfell fire, £400 million will hardly be noticed when more than £6 billion is spent by households on housing improvement each year.
Introducing compulsory purchase of land banked by developers for financial reasons sounds effective, but developers make money by building houses not selling land, if they have land on their books it is for planning, not financial reasons.
Duty Changes
The Chancellor’s approach to tax and duties also reflects the “nobody loses approach”, with ad hoc changes that mean less coherence in overall tax policy. It is reasonable to raise tax on products which harm health; alcohol, tobacco and diesel but the Chancellor has picked on tobacco for above inflation increases whist freezing alcohol duty some but not all, despite the Scottish Government announcement that minimum pricing will be implemented on alcohol – expect consumers to engage in some cross-border shopping from now on.
Planned fuel duty rises including diesel have been scrapped, but duty on some new diesel cars, but not vans, will rise. Expect more sales of light diesel vans. If diesel is a serious health problem, we need a consistent approach. On the one hand, the Chancellor announced a new clean air fund in pollution hotspots and raised the current diesel supplement in company car tax, but on the other hand, excluded vans from the higher diesel excise duty. The signals are mixed at best.
Health and welfare
Changes to the delivery of the newly introduced Universal Credit were needed, but these changes should have been made earlier when they were first identified rather than at the Budget.
The Chancellor announced much-needed additional NHS winter funding and £1.6 billion for 2018, but the focus is short term and cannot address the existing shortfall in funding for the ageing population and new treatments, and the underlying crisis in social care funding.
Business Investment and Tax
The small sums made available to support research and development and high tech sectors will provide some incentives for expansion. But again, the Chancellor deflects attention from the problems of corporation tax by the focusing on moves to limit tax avoidance and tax collection on digital giants, worth just £200 million a year.
The announcement to switch business rate rises in line with CPI rather than RPI will benefit most businesses in most years and the announcement of more frequent revaluations will smooth the impact of any property value changes, which can only benefit smaller businesses.
