New Chancellor Philip Hammond will deliver his first Budget speech next Wednesday. What can we expect?
One of Theresa May’s first acts as Prime Minister was to consign George Osborne to life on the backbenches and replace him as Chancellor of the Exchequer with Philip Hammond, the MP for Runnymede and Weybridge.
Next Wednesday Hammond will deliver his first Budget speech – and as far as spring Budget speeches go, it will also be his last. In his Autumn Statement Hammond said, “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 is also intended to ‘streamline’ the Government’s economic strategy: we shall see…
And in another break with tradition, the Chancellor has brought the Budget forward. Traditionally it has been held on the penultimate Wednesday of March: this year – clearly keen to get it over with – Philip Hammond is presenting his Budget on Wednesday, March 8th.
Who is Philip Hammond?
The new Chancellor is 61, he is the father of three children and he has been an MP since May 1997, steadily working his way up through the ranks of the Conservative party. It is safe to say he is not the most charismatic politician there has ever been – his nickname among his colleagues is ‘Spreadsheet Phil’ – but he is the proverbial ‘safe pair of hands’ and he looks likely to be Chancellor at least until the next General Election, which will almost certainly be in 2020.
The Political & Economic Background to the Budget
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 March 31st for invoking Article 50 of the Lisbon Treaty and starting the formal process of Britain leaving the EU. This will see Britain exit the EU before the next General Election and the Government’s recent defeat in the House of Lords is not going to delay this.
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.
The Bank of England has recently 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.
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.”
It is hard to see the Chancellor budging from that position next Wednesday. He started the Autumn Statement by praising “the resilience of the UK economy” and he will undoubtedly have been cheered by the Bank of England’s recently upgraded forecasts.
So what can we expect to see in the Budget?
In its Quarterly Report the Bank of England credited the Chancellor’s commitment to investment in infrastructure for some of the higher growth expectations, so do not be surprised if the Chancellor announces further investment in the nation’s infrastructure.
Neither would a further clampdown on ‘middle-class tax perks’ be a total shock. Hammond strikes me as a man who would like a simple, transparent tax system and his commitment to “a country that works for everyone” suggests that he will try and remove the loopholes and perks of a privileged few – so two words you are almost certain to hear are ‘tax avoidance’ and they could well be followed by ‘crackdown.’
Moves on savings?
The savings ratio in the UK – the percentage of disposable income that households save – has been steadily falling and (with the exception of the 2008 crash) it is now approaching levels not seen since the 1950s. With ‘Spreadsheet Phil’ having announced a “market leading savings bond” in the Autumn Statement, it is entirely possible that he will introduce further attractive 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, which we wrote about recently. 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.
What about shops and the national high street?
Retailers are under real pressure: sales figures continue to disappoint and they are now being faced with the prospect of big rises in business rates. Retailers’ associations have complained to the Chancellor of unfair competition from online businesses trading from out-of-town warehouses – where business rates are a fraction of those on the high street. I would be very surprised if the Chancellor did not at least acknowledge this problem: ‘urgent review’ could be the phrase he uses.
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.
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” I would expect him to 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 will have a much clearer idea of how the Brexit negotiations are proceeding and the likely terms of Britain’s exit from the EU. He will 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 do not be surprised if he lives up to his reputation for caution when he delivers his speech on March 8th: with another Budget to come later in the year, he can afford to proceed slowly for now.