09 Mar The Epitome of Style Over Substance
The final Spring Budget was always expected to be a low-key affair and so it proved, with Chancellor Philip Hammond delivering a polished performance, but one which lacked anything of real magnitude. Whilst the pre-budget forecasters pontificated that most of the weightier issues wouldn’t be announced until later in the year, Mr Hammond still finds himself hemmed in by crippling debt levels and stubbornly low productivity.
One of the most notable features was the anticipated cash injection into Health and Social care which was forecast at £1.3bn, came in at a much more fulsome £2bn, but this will be phased over three years, with around half to be drawn down in the 2017/18 fiscal year. The issue that appears to have caused most vexation however, is the change to National Insurance Contributions for the self-employed, dubbed as a raid on ‘white-van-man’ and carries the hallmarks of reneging on a pre-election pledge.
The significant factor as we see it, was the reaction from financial markets. There wasn’t one. Both the FTSE-100 and the broader All-Share were unchanged following the announcement. Bond markets strengthened slightly and Sterling weakened very modestly against the Dollar and the Euro but it was the magnitude of the movement not the direction that is important. It strongly suggests to us that Philip Hammond said little or nothing that was not expected, and that the growth and debt numbers used are to be taken with a huge pinch of salt, an issue we discuss in the next section.
The Economy
The Chancellor opened in ebullient mood, highlighting that the UK economy is growing at a rate second only to Germany amongst the G7 nations. The Office for Budget Responsibility (OBR) has significantly upgraded UK growth expectations from 1.4% to 2% for 2017, after the economy grew by 1.8% in 2016.
Mr Hammond said ‘The UK economy continues to astound us with robust growth and a strong labour market. Last year the economy grew faster than the US, Japan and France, and was second only to Germany. Employment is at a record high, and unemployment is at an 11-year low. But as we prepare for our future outside the European Union we cannot rest on our past achievements……’
The OBR’s stronger projection for this year has been offset by expectations of lower GDP growth for the two following years. It is expected to fall to 1.6% in 2018, before rising slightly to 1.7% in 2019, as Brexit negotiations potentially start to impact. Growth is forecast to reach 2% once again in 2021.
The salient points relating to the economy are as follows:
Economic growth forecasts
• 2017 1.4%
• 2018 1.6%
• 2019 1.8%
• 2020 1.9%
• 2021 2.0%
Inflation
• 2017 2.4%
• 2018 2.3%
• 2019 2% (and thereafter)
• This will keep inflation at or above the Bank of England’s 2% inflation target for three years
• The Chancellor hinted that real wages are expected to continue rising against this backdrop.
Public sector debt
The OBR also substantially revised downwards public sector net borrowing costs, but this is due to “one-off factors” and is not expected to lead to structural improvement over the longer term
• 2016/17 £51.7bn (£16.4bn lower than previously thought)
• 2017/18 £58.3bn
• 2018/19 £40.8bn
• 2019/20 £21.4bn
• 2020/21 £20.6bn
• 2021/22 £16.8bn
Borrowing as a percentage of GDP
The OBR lowered its expectations for net debt as a percentage of GDP to 86.6% for the fiscal year 2016/17, which is expected to peak at 88.8% of economic output in 2017/18 (1.4 percentage points lower than the previous forecast).
In 2018/19, the OBR is still forecasting debt to fall for the first time to 88.5%, reducing further to 86.9% the following year and reaching 79.8% by 2021/22.
CDC Comment –Whilst the UK economy appears to be ticking over quite nicely and the upward revision is a positive soundbite, growth forecasts are notoriously capricious and this is especially so with Brexit on the horizon. Whilst most economists can reasonably make some sense of likely activity 12-18 months hence, the game-changer will be the timeline and strategy for extricating ourselves from Europe and this could render any of the Chancellor’s forecasts largely meaningless. Quite what Brexit will mean for the UK economy is anyone’s guess but at CDC we are quite sanguine on our prospects because the UK happens to enjoy a number of strategic advantages such as language, time-zone and geography to name a few.
The ‘elephant in the room’ has been and remains debt. Whilst the OBR and the Chancellor can paint an improving picture on borrowing, the undeniable truth is that the UK’s debt mountain sits at £1.7 Trillion and it costs us £50bn a year simply to service the debt. Given this, it was almost inevitable that today’s budget was always going to be a lesson in style over substance.
Pensions and Savings
Confirmation of previously announced National Savings and Investments “Pensioner Bond” to be launched in April 2017 offering a rate of 2.2% on a maximum £3,000 investment.
CDC Comment – “In our autumn statement note we commented that this section was dull and particularly so given the blockbuster announcements of Philip Hammond’s predecessor. Again the Chancellor failed to create any headlines in this respect. Some industry commentators had expected further pension amendments but with the sole announcement being a restatement on NS&I Bonds delivered in the autumn, the press and industry journals will save some column inches.
Taxation
Aim to create a “fair and stable tax system”
Transitional arrangements for those small businesses coming out of Business rates relief and a reform of the business rates revaluation process.
Creation of a £300m hardship fund for local authorities to assist those businesses struggling with rates.
£1,000 rate discount for Pubs with rateable value of less than £100,000.
Corporation tax rate confirmed at 19% from April 2017 and to be reduced to 17% by 2020.
£140bn has been raised since 2010 by tackling tax avoidance and tough financial penalties are to be introduced for those professionals engaged in promotion of tax schemes that are subsequently defeated in court.
Announcement of measures to tackle the tax treatment differences for self-employed versus the employed. Class two NICs will be abolished as planned in April 2018 whilst at the same time Class four NICs will increase by 1% to 10% and a further 1% thereafter.
Confirmation of the Personal Allowance rising to £11,500 and higher rate tax threshold rising to £45,000 with the aim to raise to £12,500 and £50,000 respectively by 2020.
Dividend Allowance will be cut from £5,000 to £2,000 in April 2018.
CDC Comment – “Mr Hammond was clearly trying to focus his budget on a post Brexit Britain, with the aim of creating a “stronger, fairer and more global Britain”, and the restatement of lower corporation tax indicates a pro-business approach. However, the national insurance contribution changes for the self-employed, whilst positioned as fairer, may perhaps make life more difficult for our “nation of shopkeepers”. It is of course rather pedantic but nonetheless true, that a rise of 1% on a NIC rate of 9% is actually an 11% rise and could be considered a U-turn on a manifesto pledge.
The headline-grabber with regards to taxation was the large cut in the only recently announced Dividend allowance from £5,000 to £2,000. This is aimed at Owner-Directors who are able to take some of their income via dividends and the measure attempts to address the differences between the employed and those employed via their own limited company. It is important to note that this also affects those employed but with significant shareholdings and rather defeats the original intention in the abolishing of the dividend tax credit system.
The chancellor swept potential criticism of this measure aside by stating that this would be offset by a (previously announced) rise in the ISA allowance, but we are not convinced this is an adequate compensatory measure.
The announcement of financial penalties for those engaged in defeated tax planning strategies was interesting in tone and not completely unexpected but of course did lack any real detail. We at CDC have long argued that there are a number of basic tax planning steps that should be undertaken before anything that might be regarded as cutting edge is considered. We have avoided the more extremes of tax planning, a stance which continues irrespective of the penalties, but do wonder what these measures will look like and how things might be policed retrospectively.”
Note: Tax and Estate planning services are not regulated by the Financial Conduct Authority
Other Points
National living wage will be increased to £7.50.
Detail was given on the £23bn infrastructure and innovation fund that was announced in the autumn statement, with specific amounts being allocated to cutting edge industries and new 5G technology.
110 additional free schools on top of additional 500 planned to ensure that “choice is key to excellence”.
£216m to be spent on school maintenance.
£2bn to be invested into the “under pressure” social care system over a 3 year period, with £1bn in 17/18. This social care funding package aims to deliver immediate benefits to the NHS, with local authorities and the NHS working more closely in this respect.
£100m to place a greater number of GP’s in A&E departments by next winter to alleviate the pressure in departments across the country.
£325m of capital used for the first of the new sustainability and transformation plans (STPs) intended to improve health care.2017.
Risk Warnings
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