The Last Budget of Spring

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.

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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.

Image (c) HM Treasury

Jam tomorrow!

Professor of Economics, Robin Bladen-Hovell

Last Wednesday’s Autumn Statement was striking for its sobriety. Gone, largely, were the gimmicks that characterised previous Autumn Statements and rabbits were conspicuous by their absence from Philip Hammond’s first set piece.

The job, of course, was by no means easy. The austerity inheritance and recent adoption of the Brexit agenda saw to that. While the former continues to exert an unrelenting downward pressure on budgetary decisions, the latter has significantly increased the degree of uncertainty that surrounds the future thereby compounding the difficulty that the Chancellor faced in charting a prospective course for the economy. Added to this was the apparent desire to use the Autumn Statement as the first stage of a government make-over that seeks to associate the new government with more than austerity and Brexit, identifying the priorities of the new administration with the concerns of a poorly-defined group of low-to-medium income, in-work households classified as just-about-managing, or JAMs. Unsurprisingly, with so many competing claims, the resultant Autumn Statement offered relatively little to anyone.

As with all Autumn Statements it contained a variety of policy measures. The first and possibly the most important was the attempt to future-proof budgetary policy against the increase in uncertainty. This took the form of a significant relaxation of the budgetary framework within which government tax and spend decisions are taken together with the formal announcement that this would be the last Autumn Statement and that, from next year, it would be replaced by the Budget. The effect of this announcement is to provide the government next year with two opportunities to adjust tax and spending plans without either being necessarily perceived as an emergency response to changing economic conditions. Future-proofing the near term achieved. Over the longer-term, the commitment to reversing the effect of the financial crisis on the public purse during this parliament was relaxed to the point where the commitment has become simply lip service to the idea of there being a budgetary framework. To all intents and purposes the government can no longer be called for failing to achieve its targets because the targets themselves have conveniently all been moved into the next parliamentary period (2020/21). Moreover, the arbiter of whether these targets should change at any point before that date is the government itself.

Of course, much of this reflects the prospective effects of Brexit which, at present, are completely unknown. Fortunately, the economy has proven more robust since the referendum than was anticipated, with both exports and consumer spending stronger than expected. Background papers from the Office of Budget Responsibility (OBR) show total output growing over the year to the third quarter by 2.3%. However, this buoyancy has not translated into an improvement in government borrowing and the OBR predicts that government borrowing will continue to deteriorate, adding up over the next five years to a need to borrow some £122 billion more than previously predicted, with almost half of this increase due to Brexit itself.

Despite the improvement to exports, business investment declined in the third quarter reflecting the continuing effect of uncertainty on the sector and the prospects are for this weakness to spread more widely in 2017. Households, for example, are particularly vulnerable to the adverse effects of inflationary pressures that are currently building in the economy following the fall in sterling over the summer. Reflecting this, the OBR downgraded its forecast for output growth in 2017 to 1.4% which, while higher than the consensus forecast for the economy, is 0.8% lower than they predicted at the time of the Budget in March. Moreover, in a first-pass at quantifying the effect of Brexit over the longer term, the OBR also suggested that potential output for the economy will have grown by 2.4 percentage points less by 2020 than it would have done in the event of a vote to remain otherwise. It associates this weaker growth with two main factors: weaker investment and a reduction in immigration. However, in both cases the OBR acknowledged that considerable uncertainty remains.

In many respects, it was surprising that given the weakening business position, the Autumn Statement didn’t contain more assistance directed towards companies. Business taxation, including employer National Insurance contributions are scheduled to rise because of the decisions taken. Instead the corporate assistance appears to be primarily focused on the longer term – road, rail and broadband infrastructure – none of which will significantly impact in the short term. These investments, alongside investment in R&D and skills, are directed at improving productivity, an area where the UK has lagged the field for many years, reflecting the lack of a clear industrial strategy for the country. Recognising this lack is therefore welcome but much more is required before we can say that a major change in policy direction has occurred.

Another area where the Chancellor had to deliver was in relation to assistance for the just-about-managing households, or JAMs, whose prominence has risen in recent months on the back of commitments made by the Prime Minister. For this group the headlines included increases in the living wage from £7.20 to £7.50, adjustment to the rate at which benefits are withdrawn (the taper) under Universal Credit as income from work increases, together with a freeze on fuel duty and commitments to bear down on estate agent fees on those renting and raise the threshold for lower band income tax. However, these changes are dwarfed by the reduction in benefits of £3 billion that will impact on lower-middle income households in coming years since the effect of many of the measures announced fall largely on households who fall outside the JAM definition.

Taken together, the key points of interest in the Autumn Statement seem to be tacit acknowledgement by the Chancellor that the UK will pay a (potentially significant) price for Brexit. Economic momentum enabled the Chancellor to avoid making a major policy response to the referendum result in the short-term but nothing in the Autumn Statement prevents such a response being required in the future once the shape of the departure begins to emerge. As for the just-about-managing households, here it looks very much that, like Alice in Wonderland, it will be jam tomorrow.