UK Budget 2018

Budget Highlights

This is the second November budget to be delivered by a UK Chancellor, and the last before Brexit in March 2019. There has been much recent talk of ‘an end to austerity’, and for many this is how the 2018 budget will be assessed. The Chancellor, Phillip Hammond, also spoke of the ‘productivity challenge’ facing the UK and the need to deal with the productivity gap.

Forecasts for the economy

Growth

Forecasts for growth are:

2018 – forecast upgraded from 1.3% to 1.6%

2019 – 1.4%

2020 – 1.4%

2021 – 1.5%

2022 – 1.6%

These relatively low growth figures – certainly lower than the UK’s long-term trend – are mainly down to the productivity constraint.
Also, real wage growth is at its highest in nearly a decade, with it forecasted to continue to grow over the next 5 years.
Employment is predicted to rise by 800,000 by 2022, through increased labour market participation.

Public finances

Public borrowing in 2018 is expected to be some £11.6bn lower than forecast and represents 1.2% of GDP, and is forecast to be £31.8bn, and £26.7bn, £23.8bn, £20.8bn and £19.8bn in the subsequent 4 years.
GDP debt ratio is predicted to fall (from 85.2% in 2016-17) to 83.7% this year and 74.1% by 2023-24.

Measures introduced

In what is clearly a ‘stimulative’ (‘give-away’) budget, the Chancellor plans to inject an extra £30bn into the UK economy through a combination of additional spending and continued borrowing, with the lion’s chares of the extra spending going on the NHS.

Measures – many of the details were already in the public domain – include:

Personal taxation and wages

The personal allowance is to rise from £11,800 to £12,500 in April 2019 (a year earlier than planned), and the higher rate tax threshold will rise from £46,350 to £50,000.

Alcohol, tobacco and fuel

Beer, cider and spirits duties to be frozen and wine duty to rise in line with inflation.

Tobacco duty will continue to rise by inflation, plus 2%.

Fuel duty to be frozen again.

Stamp duty and housing

Shared equity purchases of property up to £500,000 are now to become exempt from stamp duty.

£500m for the Housing Infrastructure Fund, with the aim of enabling a further 650,000 homes to be built.

Defence and security

An extra £1bn for the Ministry of Defence (MOD), specifically to improve cyber defence and the UK’s nuclear submarine programme.

An extra £160m for counter-terrorism initiatives, and £10m for mental health care for veterans.

Business and the digital economy

The Chancellor also announced a new digital services tax on UK revenues of the big technology companies, from April 2020, covering companies with global sales of more than £500m, although measures introduced by the OECD may eliminate the need for this. It should be noted that this tax is a tax on digital services and not a digital sales tax.

The Private finance initiative (PFI) is to be scrapped.

Business rates companies with a rateable value of £51,000 or less to be cut by a third over two years.

£900m in business rates relief for small businesses.

£650m to help rejuvenate the High Streets.

Health (England only)

The Chancellor confirmed the announcement of an extra £20bn for the NHS – phased in over the next five years, with an extra £2bn a year for mental health services.

There will also be new mental health crisis centres in all A&E units, and an additional £700m for councils, to provide care for the elderly and disabled.

Education

A one-off £400m cash payment to help schools with new purchases.

Transport and infrastructure

A £420m package for England’s roads, to repair to motorways and mend potholes.

The opening of e-passport gates to non-EU citizens, including those from the USA, Canada, New Zealand and Australia.

Budget comment

Hammond’s steady Budget strikes a delicate balance before Brexit

Sebastian Payne

“Austerity is over” will haunt Philip Hammond for the rest of his days in the Treasury. The glib sound bite — originating from No 10 Downing Street, not No 11 — was Theresa May’s attempt, in her Conservative party conference speech this month, to show that happy days are here again for Britain. But in his third (and possibly final) Budget on Monday, the chancellor had to strike a fine balance between his innate economic dryness and the cabinet’s desire to open up the spending taps. On this level Mr Hammond succeeded.

FT Source:
Sebastian Payne 2018 “Hammond’s
steady Budget strikes a delicate balance before Brexit ” Financial Times
29th October. Used under licence from the Financial Times.

Original article:
https://www.ft.com/content/c57298f0-d92f-11e8-ab8e-6be0dcf18713

The chancellor made a subtle but crucial distinction from his boss: “austerity is coming to an end” was repeated throughout his fiscal statement. Whereas Mrs May stated that the tough times are over, the chancellor said they will soon be over. The public’s expectations were arguably raised to an unmeetable level by the prime minister; now the chancellor has been more realistic about what lies ahead. Fresh spending announcements were sprinkled throughout this year’s Budget, but few will see it as a clean break with policies of the past eight years.

Instead of making tough choices about tax and spend, the relatively strong public finances came to Mr Hammond’s rescue. Growth targets have been revised upwards, bringing extra tax revenue to fill the Treasury’s coffers. Soon they will be empty again. Personal tax allowance will rise in April 2019, to meet the Conservative manifesto pledge three years early. A rise in the higher income tax rate threshold will also be introduced next year.

The £1.5bn stimulus for high streets is long overdue (although the business rates relief is only temporary). The £1bn extra for the Ministry of Defence will keep Tory MPs happy too. A sticking plaster of £650m is going into social care in England; the same is true for £160m for fighting terrorism.

It would not be a Budget without a rabbit conjured out of the hat. This time it was a “UK digital services tax” to target big tech companies that make huge sums of money and pay paltry sums of tax through complex international structures. By targeting groups with more than £500m of global revenue, the Treasury expects it will bring in £400m a year from 2020. Although the details have yet to be worked out, this may only be the beginning. It will not be an online sales tax and the revenue is notably small. But the new tax puts Britain at the forefront of the battle between companies such as Google, Amazon and Facebook, and national governments. The question is whether the EU and US will follow this lead.

The crucial domestic announcement was more cash for universal credit. Ever since George Osborne pulled £2bn out of the new welfare system three years ago, concerns have grown that the poorest in society are being unduly penalised. Reports of poorer families and increased food bank usage have stoked fears of a backlash. The chancellor tried to see off these threats by injecting £1.7bn back into the system — plus an extra £1bn for the transition. Universal credit still has to prove it is a viable system for Britain’s 8m claimants, but it is at least better funded. Tory MPs will breathe a sigh of relief.

Yet there was little strategic boldness that so many in the Conservative party yearn for. No comprehensive plans to cope and respond to a no-deal Brexit. No radical strategies to fix the oddities and perverse incentives in the UK’s tax system. No major infrastructure projects to tackle the growing divides between cities and towns. None of this would be in Mr Hammond’s nature: his oh-so-cautious approach has resulted in his ironic nickname in the Treasury of “Box Office”. His party crucially also lacks a solid parliamentary majority to nod through any major reforms.

This Budget fulfils the basic need to see Britain through the next five months. With more public spending to plug the most obvious holes, the austerity era is gradually coming to a close. What comes next is less clear. Mr Hammond has been a successful guardian throughout these bumpy times. But come next March, Britain and its economy will enter a new era. The sense is only going to grow that he has done a good job but is not necessarily the best man to take the country into new times.

FT Source:
Sebastian Payne 2018 “Hammond’s
steady Budget strikes a delicate balance before Brexit ” Financial Times
29th October. Used under licence from the Financial Times.

Original article:
https://www.ft.com/content/c57298f0-d92f-11e8-ab8e-6be0dcf18713