30 Oct One man’s austerity is another man’s profligacy
As the title suggests, how one views yesterday’s Budget statement, the last before the UK leaves the EU, largely depends upon your political perspective. At first sight, the statement revealed some attention-grabbing giveaways, but Labour were very quick to repudiate this, suggesting the age of austerity is far from over, though we should not really be surprised by this. What is evident is that Philip Hammond used the announcement to not only hijack the ‘end to austerity’ from the Labour agenda but threw in the abolition of PFI and the Google tax for good measure.
Whilst the employment numbers for the UK are encouraging, the growth forecasts were less so and sit at the lower end of nearly all forecasts since 1985 and we wonder if the handbrake being released on public spending might be partly motivated by such anaemic growth forecasts. The fulcrum point for yesterday’s announcement was borrowing where the structural borrowing target has been achieved 3 years ahead of schedule, bolstered by a healthy tax windfall.
The headlines talk about the ‘biggest giveaway’ in a generation, which is correct in terms of the overall numbers and the sense that government departments, on average, from next year will see spending go up not down. But the key issue is that the spending review will actually take place next year, once the outcome of Brexit is known. Mr Hammond released some resource now and if Brexit goes well, there could be more to follow in the form of a ‘deal dividend’, but he was quick to caveat that a ‘no deal’ would see a return to the budgetary drawing-board and an emergency budget next Spring. We think this is probably the best he could have done under the circumstances.
With almost metronomic precision, previous budgets have talked about ‘balancing the books’ but on yesterday’s evidence, the chancellor seems content to let the deficit drift up until 2025, rather than finishing off the attempt to close the deficit sooner, something that would have been considered heresy up until now. Politically, this is a major shift of priority and has allowed the government to change its rhetoric substantially, but importantly it allows the chancellor to potentially pump up expenditure and leave a contingency for any additional Brexit costs. Digging into the numbers, a huge slice of the pie will be gobbled up by health and social care, meaning the rest may still need to be spread thinly. Consequently, some government departments might still face cuts.
As readers will see, there was very little in the budget which directly impacts personal finance, but he did perhaps save the best til last with the announcement that personal tax allowances and higher rate thresholds, a key manifesto pledge, would rise to meet their target level, not in 2020 as originally planned, but a year early. This equates to a tax cut for around 32m people, but even allowing for this and higher spending, Mr Hammond still has £15bn headroom for meeting his 2020 borrowing target.
Given the recent market turmoil, it is difficult to gauge quite what investors think. The timing of the announcement meant markets were closed by the time Mr Hammond sat down, but the FTSE all share is barely changed today and bond yields have ticked up slightly, proof if any were needed that investors probably have more pressing issues on their minds.
Below is more detail around the key points emanating from the speech which we hope you will find useful, but as always, please feel free to contact your adviser with any questions or concerns.
The Economy
The Chancellor set the tone of the budget very early in his speech, with an initial mention that this was a “Budget for hard working families”. He had very little choice in reiterating the Prime Minister’s earlier assertion that austerity was coming to an end, however, he did choose to try to score political points throughout his speech in stating that “austerity was not driven by ideology but by necessity given the failure of Labour” and referring to “Labour’s great recession”.
He revisited his theme of the UK economy confounding critics, which was supported by the Office of Budget Responsibility (OBR), offering improved growth forecasts for UK GDP of 1.6% in 2019, 1.4% in 2020 and 2021, 1.5% in 2022 and 1.6% in 2023, but the truth remains that economic growth will likely be pedestrian.
Mr Hammond took great pleasure in announcing that the OBR now forecasts lower borrowing than was predicted in the Spring Statement, with a reduction of £11.6bn. Borrowing is expected to fall to £31.8bn in 19/20 and reduce to £19.8bn by 23/24. According to the Chancellor, this means he will meet his two Fiscal rules and targets three years early, repositioning himself from “Spreadsheet Phil” to “Fiscal Phil”.
He acknowledged the uncertainty that Brexit presents, but did say that although he wasn’t complacent he does expect a deal to emerge from negotiations. In his opinion, that deal would bring with it a “double deal dividend” that would remove Brexit uncertainty but also release the fiscal headroom that he has set aside.
However, he did retain his cautious approach and in addition to the £15bn headroom, he has also increased the previous £1.5bn set aside to deal with Brexit preparations to £2bn for 2019/20. He also said he would take whatever action is necessary, with the main point being in the event of a hard Brexit, the Spring Statement may well have to be a full emergency budget. He referred to “Britain’s Jobs Miracle” in that there have been 4.2m net new jobs created since 2010 and he expects a further 800,000 to be created by 2023. He also expects real wage growth in each of the next five years.
Inflation is expected to average 2% next year in line with the Bank of England’s target.
CDC Comment – It is clear that the Chancellor feels emboldened by the state of the UK’s public finances, therefore allowing him to propose increased spending on Health, Infrastructure and Defence, along with a range of measures to boost business investment, growth and jobs during the Brexit transition. However, we would caution that the economic outlook does remain very uncertain and even with the increases to GDP growth forecasts, growth still looks anaemic and low by historic standards. The boost of a “Deal Dividend” would be very welcome indeed, however, we have highlighted the difficulties of Brexit negotiations in our recent note on the subject.
He had been slightly backed into a corner with regards to the Prime Minister’s commitment to a significant increase in spending on the NHS, as well as proclaiming the end of austerity, he complained that if we were expecting rabbits from hats, his “star bunnies have escaped”. He has painted a rosy picture of the UK economy, acknowledged the uncertainties but very little of what was announced was not already in the public domain, a fact that Mr Corbyn picked up on as simply a restatement of previously announced policies.
Personal Finance and taxation
Such is the scarcity of relevant announcements, we have further condensed these two sections, from our previous budget communications.
As with last year’s budget, there had been predictions surrounding pensions, savings and estate planning, but (thankfully) again these areas were most notable by their absence.
There has been much talk about tinkering with the pension annual allowance and pension tax relief, possibly even to introduce a flat rate of relief, although nothing was announced.
In terms of Income tax, the planned increase in the personal allowance to £12,500 will be brought forward by one year, as will the increase of the higher rate tax threshold to £50,000.
Earlier in the year, the Chancellor had asked the Office of Tax Simplification to review the complexity of the inheritance tax system and their report is due any day, however, no mention was made of this in the budget speech.
The chancellor stated that “Britain is open for business” and generously increased the Annual Investment Allowance for businesses from £200,000 to £1m.
Changes planned to the IR35 legislation, which aims to deal with the self-employed who are in fact disguised employed staff members, has been put on hold until April 2020 and will deal first with the large and medium firms operating in that fashion.
Entrepreneurs Relief, a reduced rate of tax when an individual sells a business holding, was expected to be overhauled. However, in the interests of “growth through enterprise”, the only change made was an extension of the qualifying period from 12 to 24 months, a move that will affect only a tiny minority of those that might qualify currently.
Some further tax anti avoidance measures were announced, however, they were aimed primarily at those digital platform businesses with at least £500m revenues globally. The UK Digital Services Tax is therefore squarely targeting the tech giants.
Fuel duty has again been frozen for the ninth consecutive year. Tobacco will continue to be increased by inflation plus 2%, whereas duties on Alcohol will also be held with the exception of those planned increases for what is known as “white cider”.
Note: Tax and Estate planning services are not regulated by the Financial Conduct Authority
CDC Comment – The Chancellor played a neat trick in explaining that there had been calls to delay the increase of the personal allowance and higher rate thresholds, however, he felt that finances were strong enough to pull it forward by one year. This is a welcome, if fairly minor, tax benefit which will come into force just after the Brexit deadline of 29th March 2019, so may go some way to compensating taxpayers for the uncertainty over that period.
The emphasis on corporate tax, rather than personal is also interesting. Whilst the ‘Google’ tax is welcome political capital, it goes hand in glove with attempting to level the playing field for smaller, independent businesses, particularly those on the High Street, which has been decimated in recent years. Such targeted taxation is enormously complex so a long lead time for implementation (2020) hopefully allows the authorities to sensibly define the scope and structure. The devil is likely to be in the detail but we are hopeful large tech companies will work in collaboration with the tax authorities.
What is clear is that there are growing calls for further pension reform both in terms of input amounts and the relief attached to contributions. The bill for tax relief on pension contributions is considerable and a flat rate could be an easy way to reduce expenditure if that is required, however, this would be at odds with the aim of encouraging long term pension savings and perhaps the lack of action over the last two budgets has been designed to reduce uncertainty in this regard.
With a lack of focus on pensions and savings in this budget and allowances and benefits remaining the same, now is a time to ensure that all appropriate action has been taken to obtain the best advantage. It is possible that this approach will change as we move forward through the Brexit transition and the public purse alters as a result, so perhaps with regards to pensions and savings allowances, it is a case of buy now whilst stocks last, something your CDC adviser will be happy to assist with.
Whilst the increase to the Annual Investment Allowance may not be particularly relevant to a large proportion of our readership, it is fair to say that this is a very generous five-fold increase and at a time when an increase in business investment is much needed. More clarity is needed on Brexit before confidence can return, however, any measure that helps in this respect must be welcomed.
Other Announcements
A selection of some of the other notable announcements is as follows:
Health and Social care reaps the benefit of increased spending, heavily tilted towards health, though this package had already been sign-posted. The NHS ten year plan will include new mental health crisis services with comprehensive support in every A & E department.
A big win for Gavin Williamson, via an additional £1bn spend, was the commitment to modernisation of the defence mechanisms to cope with current challenges, including cyber-terrorism and anti-submarine warfare capabilities. There was also continued commitment to the Dreadnought programme.
An additional £10,000 for primary and £50,000 for secondary schools as a one-off payment for ‘little extras’. Whilst this sounds encouraging, the total financial commitment is actually less than that dedicated to filling pot-holes and will no doubt infuriate many people in the education sector.
An end to the much maligned Private Finance Initiative (PFI), stealing Labour’s thunder, though this is largely a rubber-stamping as there are currently no initiatives subject to sign-off.
E-passport gates at Heathrow and other UK airports to be extended to citizens of the US, Canada, Australia and Japan as well as those of the EEA.
£675m High Street Fund to help councils facilitate regeneration and developing residential space where possible. There will be a re-assessment of business rates in 2021 but for the next 2 years, retail space with a rateable value of £51k or less will see a one-third reduction in business rates. This will positively impact 90% of independent stores, bars and restaurants to the tune of an average of £8,000 per annum.
Extending the relief to first time buyers, which currently sits at an 11 year high, plus extension of £500m to the housing infrastructure fund with the aim of building 650k houses, though you would have to go back to the 1960s to see anything approaching this level of construction.
A tax on the manufacture and import of packaging where less than 30% of the content cannot be recycled. He resisted the temptation to impose a direct tax on disposable cups.
Universal Credit (UC) which has been another political hot potato receives a £1bn cash injection over 5 years to allow transition from the current welfare system, though this is only half of what was expected. An additional £1.7bn for work allowance tapering so those using UC are not unduly penalised for working additional hours.
This communication is for general information only and is not intended to be individual advice. It represents our understanding of law and HM Revenue and Customs practice as at 30th October 2018. You are recommended to seek competent professional advice before taking any action.