BUDGET PREVIEW FEBRUARY 2017
by Alexander Beard, on Feb 7, 2017 11:42:17 AM
Let’s start this preview of the 2017 Spring Budget by looking back to the Autumn Statement of 2016 – Philip Hammond’s first major statement after replacing George Osborne as Chancellor of the Exchequer.
In his first Autumn Statement, Hammond announced… the end of the Autumn Statement. Declaring that, “no other major economy makes hundreds of tax changes twice a year and neither should we,” Hammond said that in future he would deliver his main Budget in the autumn. This means that 2017 will see two Budgets, before the traditional Spring Budget gives way to a Spring Statement from 2018.
The move is designed to give the Government more time to legislate those tax changes set out in the Budget before the start of the financial year. It’s also intended to streamline the Government’s economic strategy, with the Spring Statement becoming a response to the Office for Budget Responsibility’s economic forecast, rather than a major fiscal event.
All clear? Then let’s move on to another break with tradition. The Spring Budget has normally been held on the penultimate Wednesday of March: this year – clearly keen to get it over with – Philip Hammond has brought the Budget forward two weeks to Wednesday 8th March.
The Political & Economic Background
Last week, the House of Commons voted overwhelmingly (by 498 to 114) to allow Prime Minister Theresa May to get the Brexit negotiations under way. She has set a deadline of 31st March for invoking Article 50 of the Lisbon Treaty and starting the formal process of Britain leaving the EU. This should see Britain exit the EU before the date of the next General Election in 2020 and, with parliament in a compliant mood, any likelihood of a return to the polls this year appears to have receded.
What of the economy? There were any number of dire predictions ahead of the Referendum on leaving the EU – dubbed ‘Project Fear’ by the Leave supporters – but the vast majority of those have not (as yet) come to pass. By and large, the news for the UK economy is good: figures for December showed that activity in the UK manufacturing sector had reached a 2½ year high and the services sector also continues to expand.
Last week, the Bank of England sharply increased its forecast for UK growth in 2017: it now expects the economy to grow at 2% this year, up from a November forecast of 1.4% which was itself an uplift from the forecast of 0.8% in August 2016. “Domestic demand has been stronger than expected in the past few months,” said the Bank in its quarterly report, “and there have been relatively few signs of the slowdown [we] expected following the Referendum.”
The Bank credited higher spending for this, as well as the extra investment announced in the last Autumn Statement. The situation has also been helped by stronger growth in the US and Europe and the greater availability of credit for households.
However, there are perhaps two points of caution to note. Greater availability of credit is all well and good, but household debt in the UK has now returned to pre-financial crash levels – and in the same quarterly report, the Bank noted that it expected the UK savings rate (simply put, the percentage of income which households save) to fall to 4%, the lowest level since the early 1960s.
The Autumn Statement 2016
Perhaps the best way to anticipate what will be in the Spring Budget is to look back to Philip Hammond’s first and last Autumn Statement. Summing up his speech, the Chancellor said, “We have made our choices. We have set our course and we are determined to build a country that works for everyone.”
Hammond is one of the least flashy performers in the House of Commons and it’s hard to see ‘Spreadsheet Phil’ moving from the general themes he set out in that Statement. He started the speech by praising “the resilience of the UK economy” and he will undoubtedly have been cheered by the Bank of England’s recently upgraded forecasts. The Bank credited the Chancellor’s commitment to investment in infrastructure for some of the higher growth expectations, and it would not be surprising to see further infrastructure investment announced.
Neither would a further clampdown on ‘middle class tax perks’ be a total shock. Hammond comes across as a man who’d like a simple, transparent tax system and his commitment to a “country that works for everyone” suggests that he’ll try and remove the loopholes and perks of a privileged few – so two words you’re almost certain to hear are ‘tax avoidance’ and they could well be followed by ‘crackdown.’
As we’ve noted above, the savings ratio in the UK continues to fall: having announced a “market leading savings bond” in the Autumn Statement, it’s entirely possible that Hammond will introduce further savings products through National Savings and Investments as an incentive for households to save more.
Housing and Social Care
One area where the UK clearly has a growing problem is in housing and social care. The Spring Budget may well see the first steps in what will be a prolonged series of government actions to tackle the ‘social care time bomb.’ The government wants to make it easier for older people to move into smaller homes, freeing up larger properties for families. Eventually, we would expect the introduction of incentives for this and for good-quality, new build sheltered accommodation: the Budget may see the Chancellor take a step in this direction or at least signpost future measures.
We could also see more moves to protect those in rented accommodation (following on from the action taken in the Autumn Statement) and further steps to release brownfield sites and surplus government land and increase the density of projects in towns.
Will the UK become an offshore tax haven?
There has been much talk of the UK slashing corporation tax rates post-Brexit, so it is perhaps worth spending a couple of paragraphs looking at that option. Will Philip Hammond take the first steps to turn the UK into a tax haven for companies, with corporation tax rates specifically designed to tempt them to move their headquarters and tax base to the UK?
Hammond has floated the idea of slashing rates if the Brexit negotiations with the EU “turn sour”. However, analysts have suggested that the UK simply cannot afford such a move while the country is running a large budget deficit. Corporation tax cuts have already reduced the Government’s tax ‘take’ by £11bn a year: Martin Beck at Oxford Economics said, “If you look at countries like Ireland or Singapore, they didn’t have anything to lose when they embarked on the policy. But for the UK – raising almost £50bn a year from corporation tax – it could be much more costly.”
The question for the Chancellor is simple: would lower rates attract more companies and, therefore, ultimately boost his tax receipts, both from corporate and individual taxes? Having already given a commitment to reduce Corporation tax to 17% “by the end of this parliament,” he may well keep further options open and proceed cautiously as the Brexit negotiations progress.
By the time Philip Hammond delivers his second Budget of 2017 in the autumn, he’ll have a much clearer idea of how the Brexit negotiations are proceeding and the likely terms of Britain’s exit from the EU. He’ll also have seen what effect President Trump’s economic policies are having in the US and what impact the elections in Holland, France and Germany have had on Europe. So don’t be surprised if he lives up to his reputation for caution when he delivers his speech on 8th March: with another Budget to come later in the year and the almost-certain knowledge that he’ll be Chancellor at least until the summer of 2020, he can afford to proceed slowly for now.