09 March 2017
Budget 2017
Biting the hands that feed you.
By Frank O’Nomics
Pre-Brexit caution is prudent, but the Chancellor may have undermined part of the engine of growth.
The numbers look impressive. The independent forecasts from the Office of Budget Responsibility show UK growth forecasts of 2.0% this year and, despite a dip, a return to a similar level by 2020/21. Such growth helps government borrowing levels to fall from 3.8% of GDP to 0.7% by 2021/22. This gives the Chancellor £26 billion of headroom over the period, so why then has he produced such a cautious Budget which, rather than using the money to give significant help to areas in great need (the NHS for one), actually takes some money away from those that have hitherto played a major part in driving the impressive growth rate?
The answer – and Gordon Brown would like this – is prudence. Not only do we not know how Brexit negotiations are likely to proceed, we do not know what the impact on the economy will be and what price the EU will exact for our exit. The OBR figures may be independent, but are inevitably highly speculative. The appliance of exacting analysis in such a situation can only create spurious results, particularly when budget deficit calculations involve looking at the difference between two very large and highly variable numbers. That number, even if it is £26 billion, may not look that reassuring if estimates of the bill to leave the EU is as high as many have suggested, at £60 billlion.
There are other reasons for not being more generous. The OBR asserts that the benefits to borrowing data are a ‘one-off’ rather than a structural improvement, so caution ahead of a shift in the economic cycle makes good sense. Secondly, the Chancellor has no need to be generous. The economy is doing very well without additional help for now, so it may be sensible to keep something in reserve for a rainy day. Finally, there is little political pressure to be more benevolent. Yes, there has been a lot of outcry, and potential back-bench rebellion, over business rates and social care provision, but the Chancellor has (without spending very much) made much of additional provisions on these counts in this latest Budget.
The issue then may not be that the Chancellor should have given away more at this juncture, but there is a question over the way in which he is adding to the government tax take. One of the biggest factors that both helped the resilience of the UK economy through the financial crisis and produced the second best GDP growth last year of any developed economy is our flexible labour market, and in particular a thriving self-employed sector. One of the justifications for going self-employed has historically been a better tax regime. The Chancellor has decide that, on the basis that the self-employed will receive the same retirement benefits, they should pay the same levels of National Insurance as those in employment. That all makes sense unless you factor in the fact that the self-employed do not benefit from auto-enrollment benefits. For those earning less than £16,250 the amount of NI they pay will fall because of the abolition of Class 2 contributions, but for the rest (and £16,250 is hardly a large amount) Class 4 contributions will rise from 9% to 11% over the next 2 years.
The economic engine gets a further hit from the sudden volte face on tax free dividends. The threshold has been reduced from £5,000 to £2,000 only a year after it was introduced. This will impact many business owners paying themselves a dividend and will increase their administrative burden, with many having to go back to filling in a tax return which the old threshold had negated.
The third damaging factor is the further reduction in the money purchase annual allowance that can be paid, tax free, into a personal pension – from £10,000 to £4,000. The justifications for paying into a pension have been eroded in a long series of budgets, which may make sense in terms of balancing the short-term national finances, but rather less so if in doing so it creates an impoverished society in retirement.
Finally there are the inflation forecasts. A rate of 2.4%, falling to 2.0% by 2019, hardly leaves much room for manoeuvre if there is a resurgence in commodity prices. This leaves a very real danger of a rate increase which would be very uncomfortable for those running a small business on expensive credit. The Chancellor asserted that real wages would be rising through this period of higher inflation, but that statement may prove to be government legerdemain resulting from increases to the minimum wage – for others real incomes could be under pressure.
History will probably not dwell on what is supposed to be the last spring Budget ever (we’ve heard that before). So much of what was in the detail had been drip fed to the media for some time and it is hard to pinpoint any element that creates any ‘wow’ factor either positive or negative. ‘Spreadsheet Phil’ will for now be regarded as a careful Chancellor who does not want to take risks based on a surprising economic windfall. However, if he continues to sap the energies of the self-employed the data may start to create surprises in the opposite direction.
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