Article by Professor of Economics, Robin Bladen-Hovell.
As the final outing of the Spring budget and with a further budget scheduled for the Autumn, this was always going to a muted affair. It was underpinned by an upgrade to predicted economic growth for the year though the upgrade occurs largely in the first quarter, reflecting continuing buoyancy in consumer spending and the boost to exports following the post-referendum fall in the exchange rate. However, the improvement is scheduled to be short-lived with growth forecasts for the end of the year little changed from those delivered by the Chancellor last November. Alongside the boost to net exports, the falling exchange rate is stimulating inflationary pressures in the economy and higher prices will dampen the spirits of both consumers and exporters, as the squeeze on household budgets tightens and the recent gains in competitiveness are offset.
Against this backdrop the Chancellor delivered very few surprises. For businesses, the budget contained transitional relief to offset the worse effects of the business rate revaluation. For self-employed, however, the news was far less welcome with an increase in the Class-4 National Insurance – a tax increase by another name. The latter is likely to prove particularly controversial for the Chancellor because while the tax revenue generated is modest, the increase breaks a clear manifesto pledge made ahead of the election which the current Prime Minister supported at the time. No doubt we will now see the entertaining spectacle of senior members of the government dancing on the head of a pin explaining how manifestos say they mean even when the politicians themselves do not mean what they say.
The changes announced for households yesterday were modest. A new sin tax on sugar was introduced and the duty on cigarettes was increased with the introduction of a new minimum tax targeting cheap tobacco, while duty on alcohol will increase with inflation. Many other, more significant changes, however, were announced ahead of yesterday’s budget but will only now be coming into force. Some, such as the uprating of personal allowances, will be gratefully received by those “Just About Managing” who are reputedly a focus for the current government. Others, such as the continuing freeze on many working-age benefits, will cause increasing hardship and despair for households who fall below the JAM threshold. For these families, the overall effect on family income is likely to be highly significant this year as inflation rises.
On the expenditure-side, Chancellor was forced into an about-face in relation to Social Care with an additional £2 billion promised over the next three-years. This reverses statements made by the Chancellor and other members of the government recently in relation to the (non) crisis in Social Care, but welcome nevertheless.
The obvious elephant in the room throughout the Budget Statement was Brexit. This received scarcely a mention by the Chancellor, the key message seemingly being one of “steady as she goes” and “don’t frighten the horses”. The reasoning behind this was apparent from the paperwork behind the Office for Budget Responsibility forecasts underpinning the budget: there is no clarity regarding the likely effect of our leaving the EU. Economic buoyancy could yet transform into an economic deadweight. Preparing for the worse while hoping for the best was therefore the order of the day, and with the return of prudence who had previously advised Gordon Brown before the economy went south, Philip Hammond decided to accumulate any spare cash into a life-belt that could be thrown to those members of society who find the harsh reality of Brexit too hard to bear. Of course, if no-one is deemed needy enough, a life-belt can easily be transformed into a war chest ahead of the next election.