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Budget 2017: 10 things to look for

UK chancellor Philip Hammond is under pressure from all sides as he prepares to deliver his second Budget on Wednesday.

The first Budget of a new parliament is traditionally the time for chancellors to take bold decisions about taxes and spending. But the economic forecasts are likely to be difficult, public services are under strain, and pro-Brexit MPs are increasingly turning on the chancellor over his support for a soft Brexit.

If Mr Hammond produces a safety-first Budget, he squanders his opportunity to decisively shape Britain’s future. But boldness risks backfiring, and steering a middle course threatens to satisfy nobody.

Here are 10 things to look out for when the chancellor stands up at the despatch box.

1. Economy

The independent Office for Budget Responsibility will serve a cold dish of downgrades for the UK economy. In the short term, the growth forecast for this year will be cut from 2 per cent to about 1.6 per cent, and from 1.6 per cent to about 1.4 per cent for next year.

The OBR’s medium-term forecasts depend on its assumption for productivity growth, which it has already said will be cut “significantly”. That means growth figures for 2020 and beyond will be closer to 1.5 per cent a year, compared with the 2 per cent that the fiscal watchdog had previously forecast.

2. Public finances

Tax revenues have been stronger than expected this year, alongside lower than expected public spending. As a result, this year’s expected public borrowing will fall by about £8bn. The debt burden will begin to fall next year, giving Mr Hammond the opportunity to boast that he has turned the corner on public finances.

But good news in the short term disappears towards the end of the forecast horizon, as weaker economic forecasts bear down on projected tax revenues. Before any accounting or tax changes, the deficit forecast in 2020-21 is likely to rise by more than £10bn compared with the March forecast. The government has already said it wants to reduce borrowing to under 2 per cent of national income by 2020-21, but Mr Hammond’s headroom is likely to roughly halve, from £26bn to about £13bn, in that year.

3. The main message

The chancellor wants to signal that after a difficult year, things are looking up, with debt falling and Brexit-related uncertainties lifting. To offset bad news in the medium-term public finances, he will use a £5bn-a-year accounting change — by taking housing associations’ borrowing off the government’s books — to free up more money for housing, wages and healthcare.

4. Housing

Fixing the “broken housing market” is the government’s biggest domestic priority. The chancellor wants to make rents more affordable and ease the path to home ownership for younger adults who have deserted the Conservative party in recent elections. Mr Hammond has already set a target of 300,000 new homes per year, but has also insisted there is no “single magic bullet” to solving housing problems.

He will announce a housing package on Wednesday that is likely to include commissioning of new building on public land and funding for local authorities to construct homes. He will also reaffirm the Tories’ promise from last month’s party conference to commit £10bn more of Help to Buy equity loans, and set out plans to lower stamp duty for some first-time buyers. There will be no big reform of planning laws for the “greenbelt” of protected area outside of London, but local authorities could be given more powers for compulsory purchase of land.

5. Productivity

The only way Britain will escape its current economic difficulties is by improving productivity, so economic growth and tax revenues can rise faster than currently forecast. While the OBR will downgrade its productivity growth forecasts on Wednesday, Mr Hammond will put in place plans aimed at reversing that decision in future. He will set out parts of the government’s industrial strategy, including allocating money from the £23bn national productivity investment fund and the £5bn industrial strategy challenge fund for transport and infrastructure projects.

6. Public sector pay and social security benefits

A cap on public sector pay rises and a freeze in social security for non-pensioner benefits have hit people harder than intended as inflation has soared. Mr Hammond — who has said that public servants “do brilliant work” — is expected to relax the public sector pay cap from April 2018. However, pay rises for public employees are still likely to fall short of the current 3 per cent rate of inflation. Benefit recipients are expected to get limited relief relating to the current six-week wait for universal credit payments.

7. Health and public services

NHS England has said an extra £4bn a year is needed to stop the health service from deteriorating. Mr Hammond will not give the health service £4bn a year, but he is likely to go some way towards boosting National Health Service funding, including through pay rises for nurses and hospital staff.

Policy experts say prisons are in more urgent need of a funding boost, as are counter-terrorism activities. But schools are likely to be disappointed, as Treasury officials think they are performing adequately on existing budgets.

8. Students and youth voters

The prime minister has already announced that the salary threshold at which graduates have to start repaying student loans will rise by £4,000, to £25,000, from next April. This costs the government nothing in the short term, but £2bn a year in the long term. While there have been reports about possible income tax breaks for young people, such plans are likely to have been shelved after being deemed too complicated.

9. The self-employed

Following his embarrassing U-turn after proposing to raise national insurance contributions for the self-employed in the March Budget, the chancellor is likely to tread very carefully in this area. But Treasury officials still believe the tax system is too generous to the self-employed and incorporated service companies, encouraging too many people to seek this status even if they are technically employees.

The chancellor considered a controversial crackdown on bogus self-employment to the private sector, but he is thought to have concluded not to rush the move and that more public consultation is needed.

10. Fuel, fags and booze

Mr Hammond must set duty rates for petrol and diesel, alongside “sin” taxes on cigarettes and alcohol. Alcohol duties are likely to rise in line with inflation, while tobacco duty is likely to continue to rise 2 percentage points more than inflation.

The big unanswered question, however, is surrounding fuel duty, which has been frozen since 2010. A further freeze would cost the Treasury another £750m a year, given the current rate of inflation. Mr Hammond is likely to continue to freeze petrol duty, but begin raising diesel duty, saying such a tax increase will be better for the environment.

. . . and the joker in the pack

No Budget is complete without an unanticipated joker that the chancellor hopes will surprise MPs, delight his supporters and generate favourable headlines.

A plausible joker is that the Treasury will bring forward the increase to the income tax personal allowance to £12,500 from £11,500, and the higher rate threshold from £45,000 to £50,000 next year — well before the manifesto promise of 2020. If the allowances are then frozen, it will only cost the exchequer money in the short term, before the public finance squeeze really takes hold.

Article from the “Financial Times”


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