23 Nov Autumn Statement 2016
Wednesday saw Phillip Hammond’s first Autumn Statement and the first major pronouncement of the state of the nation’s finances since Brexit. Last weekend the New Chancellor said his plan will not include a big new spending push due to the high levels of public debt but with Tuesday’s announcement that UK public finances beat expectations in October, showing a much smaller deficit than expected last month, although still weak over the year, it may have provided additional space for the Chancellor to manage the difficult balance of reducing debt whilst increasing spending to help support the economy.
As we highlighted earlier in the year the March Budget was expected to be a fairly tricky affair given its was a post-election budget in which the incumbent Chancellor George Osborne was seeking to make £4bn of savings whilst not tampering with some major areas of personal taxation.
As was his style whilst in office, Mr Osborne was able to present a budget plan that, whilst not being quite as shocking as previous announcements on pensions, still delivered a surprise reduction in CGT rates and increases in tax thresholds that were welcome for many. It remains to be seen whether our new Chancellor will follow this trend of steady delivery with some grandstand unexpected announcements or follow a more cautionary path to his stated aim of fiscal discipline, “returning the budget to balance over a sensible period of time, in a way that allows space to support the economy as needed”.
Perhaps reflecting the state of global politics at present the Chancellor displayed that he does in fact have a wry sense of humour. The way in which he signposted a resignation, by explaining that the Autumn Statement will in fact be replaced by an Autumn Budget, whilst the Spring Budget becoming a Spring Statement, amused not only the House but also those around the table at CDC.
So has Mr Hammond managed to pull off any surprises? As is our habit we will deal with the statement in distinct sections.
The Economy
The OBR expect GDP growth to come in at 2.1% for 2016, 1.4% in 2017, 1.7% in 2018, 2.1% 2019 and 2020 then 2% in 2021.
The Chancellor scrapped the plan of balancing the budget by 2019/20 instead stating that it “will be returned to balance as soon as is practicable”.
He set three new fiscal rules; Balancing the budget as soon as possible in the next parliament, Public sector net debt to be reducing by the end of this parliament and a welfare cap which would be set by Government and monitored by the OBR.
He also echoed statements made by his predecessor that the North East has taken its fair share of job creation, displaying the fastest of all regional growth.
Priority will be given to investment in high value infrastructure and innovation funded by additional borrowing. This will see creation of a national productivity fund of £23bn over five years investing in research and development in science and technology, economically constructive infrastructure and housing reforms.
Government borrowing is expected to be £68.2bn this year, £59bn in 17/18, £46.5bn in 18/19, £21.9bn in 19/20, £20.7bn in 20/21 and £17.2bn in 21/22, representing a fall in Public Sector Net Borrowing as a percentage of GDP from 4% to 0.7%.
Measures were announced to drive up the performance of regional cities and areas such as the Northern Powerhouse and Midlands Engine Room, through improvements in local transport networks and digital infrastructure.
The previously planned efficiency review looking for £3.5bn of savings will continue with public services, defence, overseas aid and the triple lock of pensions protected.
CDC Comment – Whilst the growth predication for 2016 is slightly higher than the 2% forecast in March, there has otherwise been a sharp revision downwards given the UK predicament post Brexit vote. In March the OBR suggested 2017 growth would come in at 2.2%, this is now a measly 1.4% reflecting “greater uncertainty and higher inflation expectations due to weakened sterling”.
The chancellor did attempt to divert attention by proclaiming that this rate of growth would still outstrip our European neighbours and indeed making the UK the fastest growing developed economy. We did comment in March that the growth forecasts, regardless of a Brexit vote, looked ambitious and it may be that given the downgrade, they are now in more realistic territory, however, this still depends on the terms on which we negotiate our exit from Europe and our ongoing relationship with the rest of the world. We will save our opinion on Farage for US Ambassador to a later date…..
As was widely expected infrastructure spend was the main theme of this statement. In an era when traditional monetary policy has failed to ignite the economy and with no material room left in this respect, it is inevitable that Fiscal spending would be the next step. The Chancellor’s ambition should be applauded and one would expect that spending on these projects will have the desired effect, however, they do still need to be paid for and without growth coming through, and the aim of cutting borrowing overall may well be consequently side-lined.
Pensions and Savings
A new savings bond will be issued by NS&I paying a rate of 2.2% in April 2017, with a maximum investment of £3,000.
The Money Purchase Annual Allowance for pension contributions will fall from its current £10,000 level to £4,000
CDC Comment – Pensions and Savings provided some of the headline grabbing elements of George Osborne’s budgets and Autumn statements, but this trend did not continue with Mr Hammond. To say this section was dull would be an understatement.
We previously welcomed the introduction of NS&I “Pensioner Bonds”, despite the fact that they were only available for the over 65’s, they did offer real market leading rates for larger sums, but with the newly announced bond being just one year in term and capped at £3,000 that is nothing to write home about.
The change to the Money Purchase Annual Allowance is designed to further discourage those that have accessed their pension pots through the new flexible freedoms from making further pension contributions. This is quite a dramatic reduction, but given the small number it applies to it is barely noteworthy.
Taxation
Corporation tax rate to reduce to 17% as signalled previously by 2020.
Personal tax allowance to increase from £11,000 to £11,500 in April 2017.
Commitment to increase the basic personal allowance to £12,500 by 2020, accompanied by a corresponding increase in the Higher Rate Threshold over the same time-frame to £50,000.
Tax savings on salary sacrifice and benefits in kind to be stopped. There will be exemptions for ultra-low emission cars, pensions, childcare and cycling to work schemes.
Employee and employer National Insurance thresholds to be equalised at £157 per week from April 2017.
Insurance Premium Tax which currently attracts a 50% VAT reduction, will increase from 10% to 12% from June 2017.
The taper rate at which universal credit is withdrawn as earnings rise to be reduced from 65p to 63p at a cost of £1bn from April.
CDC Comment – Philip Hammond’s soothing overtones on the tax requirements gave the feeling he was limbering up for a ‘show-stopper’ but for the most part he was merely restating George Osborne’s previous pledges.
It is certainly true that the room for manoeuvre within the taxation system is constrained by high debt levels. The Government however remains committed to squaring the books but the ethereal nature of the timeline caused laughter on the opposition benches. It also consigned his predecessor’s previously rigid targets, most of which he missed in any case, to the junk-pile.
Whilst a reduction in the Corporation Tax rate is welcome, and a proven stimulant for the economy, Teresa May’s has previously said she wanted the UK to have the lowest rate amongst the G20 nations. This probably heightened expectations and meant today’s announcement was met with disappointment that the rate was not reduced to 15% – the rate promised by Donald Trump in the US.
Note: Tax and Estate planning services are not regulated by the Financial Conduct Authority
Other Points
Fuel duty increases were postponed again, saving the average car user £130 per annum and the average van user £300 per annum.
The National Living Wage will increase from £7.20 per hour to £7.50 per hour in April 2017.
Risk Warnings
Certain disciplines and activities are not regulated and these are highlighted in the relevant parts of this newsletter.