Productivity and Brexit remain the elephants in the room

23 Nov Productivity and Brexit remain the elephants in the room

Conventional wisdom would dictate that the first budget of a new parliamentary term should provide the opportunity for a Chancellor to be bold but given the tenuous position of having no overall majority and the travails of Brexit, a more prosaic budget was perhaps an inevitability. Philip Hammond was no doubt also mindful of his embarrassing climb-down following National Insurance reforms at the last budget, meaning high-risk strategies were never likely to feature.

He used lower borrowing forecasts to signal ‘headroom’ which he intended to use to provide a ‘little help to families and businesses’. The operative word here was ‘little’, as there were almost no headline-grabbing give-aways. Moreover the more eagle-eyed, will have spotted that the actual amount of ‘headroom’ has actually fallen by around £11bn.

Mr Hammond positioned the budget as a ‘balanced approach’ and this is probably a fair assessment, though it should not be confused with a ‘balanced budget’ which is far from the same, and remains a pipe dream. Not only was he constrained by looming Brexit, for which he set aside a further £3bn contingency, he was also hemmed in with a whopping downgrade to economic forecasts by the Office for Budget Responsibility (OBR). The 2017 economic growth forecast was revised down from 2% to 1.5% heralding a slower growth rate for the next 5 years due in the main to productivity, which is essentially the amount of wealth generated per hour worked. In the UK, this has remained stubbornly low and this lies at the heart of the economic problem. Indeed productivity was the watchword, appearing 136 times in the speech, and remains the key to igniting growth, according to most economists.

The Sword of Damocles has become synonymous as a reference to impending danger and for the UK, this relates to the vagaries of Brexit. Much hinges on this for the UK. A painful exit could easily scupper Philip Hammond’s fiscal numbers (again!), but a good outcome frees up the £3bn contingency put aside yesterday, for pre-election give-aways.

The show-stopper was reserved until last, a welcome and worthwhile incentive to first time buyers in the form of stamp-duty exemption on properties valued at up to £300,000. In higher cost areas, the relaxation extends to properties valued up to £500,000, but again it is only the first £300,000 which is exempt. Herein lies the conundrum which suggests good politics can equal bad economics. Whilst the tax break might stimulate demand, on the supply side, the promise to build 300,000 new homes each year was short on detail. The Prime Minister has staked her own reputation on fixing the housing issue which means there is much riding on these initiatives. But stimulating demand without a commensurate increase in supply, can only lead to one outcome – higher property values, at least until we see spades in the ground which is likely to be some way off.

Surprising was a virtual absence of anything which might be perceived as a call to action for savers or investors, with ISAs and pensions left untouched. Much of the speculation before the budget was around a further attack on pensions, but this failed to materialise. Financial markets gave a muted response with stock prices virtually unchanged. Gilts improved on the deteriorating economic picture and sterling gave back pre-budget gains, also reflecting the benign economic landscape in the coming years.

Below is a summary of the key points, using our usual format. If you have any questions relating to any aspects of the budget, please do get in touch with your adviser.

The Economy

The Chancellor opened with recognition that EU Brexit negotiations were at a critical phase, but that the Government were preparing for every Brexit eventuality and committed to maintaining the “deep and special relationship” between the UK and the EU. In order to do so a further £3bn was committed over the next two years for the necessary preparations.

He continued his positive positioning of the UK economy stating that it “confounds those that continue to talk it down”. This was further to the ebullient mood we mentioned in our spring update when the Chancellor had highlighted that the UK economy was growing at a rate second only to Germany amongst the G7 nations, a fact that was firmly rebutted when Mr Corbyn took to the floor to suggest that in fact the UK economy was now the worst performing of the G20.

The Office for Budget Responsibility (OBR) had previously upgraded UK growth expectations, however these have now been revised downwards significantly from 2% in March to just 1.5% for 2017. Further downgrades were given before the expectation of improvements by 2021, although the levels do remain much more subdued than in March.

Inflation is expected to peak this year at 3% before falling back towards target, with Mr Hammond confirmed the target will remain at 2% CPI.

The Deficit is expected to shrink by 2% next year, but it remains that Debt interest costs more than the Police and Armed Forces combined. It is expected that Debt will peak this year and will fall as a percentage of GDP, standing at £49.9bn in 2017, which is £8.4bn lower than expected, moving to £35bn in 2018 and £25.6bn by 22/23.

A range of measures were announced with the aim of “looking forwards and not backwards” and “seizing upon the opportunities” whilst “Investing for a bright future”:

  • The National Productivity Investment Fund was extended from £23bn to £31bn
  • £500m investment for innovation in technology
  • £400m investment into charging infrastructure and other measures to incentivise electric car ownership
  • Focus and support for Maths training which the Chancellor states is “vital in a high technology economy”
  • £1.7bn committed to a Transforming Cities Fund, to support regional development.

 

CDC Comment – Despite the positive spin and improved jokes, most notably the cough sweet and Jeremy Clarkson remarks, there can be no doubt that the economic picture appear much gloomier than the rather upbeat prediction in March.

It is clear that although global economic growth remains robust, the UK outlook has deteriorated and with Brexit likely to create short term headwinds at the least the OBR is taking a much more cautious stance on UK economic growth. It is important to note that economists have a habit of not only allowing themselves wide margins for error, but are very often more overly optimistic at the beginning of the year, with downward revisions almost always following.

So whilst the UK economy is not really “confounding” anyone, it is important to note that both the forecasts and real GDP figures suggest an economy that is growing.

The ability to positively spin bad news is particularly evident in the presentation of the Public Debt figure, which is likely to fall over the next few years but not as quickly or to as low a level as was predicted in March.

Perhaps the tone of this budget was set to suggest that we are indeed in a transitioning period where the workforce and infrastructure of the UK needs to be improved to not only deal with the productivity problem but also to adjust to the new modern economy that will be necessary to survive post Brexit.

It was pleasing to see particular comment on two projects within our own region, with announcement of investment in rolling-stock for the Tyne and Wear Metro and commitment to the Redcar Steelworks redevelopment.

Personal Finance

The National Living Wage will rise 4.4% to £7.83 per hour from April.

Vehicle Excise Duty will increase from April 2018 for the most polluting Diesel cars, although the Chancellor was keen to point out that this would not apply to vans and therefore “White Van Man/Women”.

The planned fuel duty rise in April has again been postponed.

Duty on Tobacco will increase with Inflation plus 2%.

Duty will increase on the problem high strength white ciders, but will remain frozen elsewhere.

Extension of young person’s railcard from age 25 to 30.

The housing market was perhaps the biggest focus and where the headlines will be created. The Chancellor echoed the Prime Ministers aim of dealing with the housing shortage by introducing a range of measures, including:

  • 5year £44bn capital funding, loans and guaranteed to support housebuilding
  • Urban planning support to include high density but high quality housing
  • Housing Infrastructure fund increased to £2.8bn
  • Review of gap between planning permissions and new housing starts, with direct intervention if required
  • Abolishing Stamp Duty for first time buyers on purchases up to £300,000 available from today along with measures to reduce Stamp Duty for first time buyers buying in high value areas

 

CDC Comment – We have had to rename this section of our update from “Pensions and Savings”, which had previously seen some very interesting changes to become a bit of a damp squib over the course of this year.

There were of course no specific references to pension or savings, but perhaps that is to be expected given the rapid rate of change we have witnessed in recent budgets.

The headline within this section of the Chancellors speech, for a number of reasons, will be the moves to deal with the housing shortage and making it easier for First Time Buyers to get onto the housing ladder, which surely must be welcomed.

However, it is important to note that if you are buying a £200,000 property from midnight tonight you will save £1,500 in stamp duty, although the OBR believes that this will add 0.3% i.e. £600 to house prices over the next year. Therefore mitigating the saving somewhat and increasing the price of an already (too) expensive purchase.

Taxation

£4.8bn of measures were announced to reduce tax evasion and manipulation of the tax system, which includes measure to apply income tax to the royalties earned in the UK for multi-national businesses.

Corporation tax would be frozen at current levels and in order to harmonise with the personal tax system, indexation allowance will be capped up to April 2018.

There was no reduction in the VAT threshold, which was somewhat expected but the Chancellor did announce that a review would begin on its design and implementation.

Further measures to limit the impact of business rates on small businesses were announce including a link to the lower CPI rather than RPI measure of inflation.

In terms of Personal Taxation, the Personal Allowance will rise to £11,850 and higher rate tax threshold rising to £46,350 from April next year, but there was no mention of the previously stated aim to raise to £12,500 and £50,000 respectively by 2020.

Note: Tax and Estate planning services are not regulated by the Financial Conduct Authority

CDC Comment – Again this was a rather quieter section than we have seen in previous budgets and perhaps disappointing that tax allowances were not increased more rapidly.  However, it was pleasing to see that no more punitive measures were introduced to the dividend/savings tax rules.

Following recent publicity surrounding the tax affairs of some of the larger multi-nationals and high profile celebrities, it was inevitable that some further measures would be introduced to deal with the bending of tax rules. This is obviously a popular move and whilst avoidance of UK tax is important the Chancellor will be all too aware that more penal tax rules can and do become off-putting to those companies that have a degree of flexibility on how they organise they tax affairs.

Having watched the documentaries on the “Paradise Papers”, we have wrestled with the negative connotations of the term “Offshore Investment” and can assure readers that the revelations of these programmes are far removed from the mainstream approved tax planning and investment strategies employed here at CDC.

Other Points

The NHS will receive an additional £10bn of funding for the front line over the course of this Government. Whilst an eye-watering number, senior health officials had campaigned for more.

Additionally there will be a further £2.8bn of funding with £350m immediately, £1.6bn in 18/19 and the balance by 19/20.

There will also be a review of pay which will be funded by additional government funds rather than needing to be allocated from existing budgets.

 

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 22nd November 2017.  You are recommended to seek competent professional advice before taking any action.