23 November 2017
From “Spreadsheet Phil” to “Hamstrung Hammond”.
Budget hat devoid of rabbits.
by Frank O’Nomics.
Ahead of this week’s Budget there was, as ever, no shortage of advice for the Chancellor from every conceivable direction. Whether it was demand for more housing, more pay for the public sector or student debt relief the message was clear – end austerity and increase government borrowing. However, what we all knew was that the Chancellor’s room for manoeuvre was exceptionally slim and, while giving lip service to all of these areas, the degree to which he could fund any solution was going to be very limited. Recent borrowing numbers may have come in below forecasts to give some short-term scope, but this was more than eradicated by changes in forecasts for future growth from the independent Office for Budget Responsibility, after they incorporated their much heralded revisions to productivity and business investment into their calculations. Any attempts to be creative, or even remotely controversial, were destined to be thwarted by an inability to gain enough support to get the measures passed. In short the Chancellor is constrained by having no money and no mandate.
Within this Budget the statistics are more interesting (and arguably more important) than the policies, so first let’s look at the economic forecasts. Incorporating the new realism in productivity growth expectations meant that the OBR downgraded its forecasts for real GDP growth for each of the next 5 years, leaving nominal GDP 2.5% lower than previously expected at the end of the forecast period. Lower growth will mean that government receipts up until 2021/22 will be some £20 billion lower than they were forecast to be as recently as March. In turn this will lead to higher borrowing figures over the period and hence limited scope for the Chancellor to be helpful.
Turning to the budget measures themselves, the crucial question is, despite paying lip service to all of the issues seen as key ahead of the event, do they have any substance? One area in which the Chancellor may receive some plaudits is housing. Finally there are moves to tackle the supply side of the crisis rather than trying to control demand. £44 billion of funding and guarantees to help home building will be welcomed, as will measures to tax empty properties and unlock land for development. Whether this will be sufficient to generate the building of 300,000 new homes a year remains to be seen. The private sector will need to step up to generate a lot of this supply and it is not clear that these measures will do the trick. What is less encouraging, however, are the measures taken on the demand side. By resorting to populist policies, the government has made the mistake of providing a further stimulus. Most Budget-related headlines will focus on the cutting of stamp duty for first time buyers, but all that is likely to do is reduce government revenues and create increased demand which will force house prices up still further. In a heartbeat prices are likely to rise by more than the stamp duty saved and so make housing still less affordable. The only way to make housing more accessible to younger people is to build more of it.
Other measures cover the requisite ground but in a manner that will make very little difference. An additional £2.8 billion of funding for the NHS inevitably falls well short of the sum requested, which was £4 billion for next year alone (when they will get £1.6 billion). Public sector pay overall is not getting the hoped for boost, but new money will be found to fund pay rises for nurses if recommended by an independent body – and it would seem very strange if they did not recommend. For businesses, indexing business rates to CPI instead of RPI may make a significant difference over a long period of time, but will be irrelevant in the near-term if demand takes another Brexit related hit. At least Mr Hammond did not make the mistake of reducing the VAT threshold of £85,000 as had been suggested. He might find that increasing rather than decreasing this threshold could solve part of his low productivity conundrum. With respect to pensions there will be some relief that Mr Hammond resisted the temptation to further reduce pensions tax relief
Part of the problem for the Chancellor was that he had spent much of the money made available by the improved public finance data way ahead of the event – particularly by giving commitments to alleviate the burden of student loans. Despite the clamour from those who knew all along that there was no scope for the Chancellor to satisfy their demands, what he, his party and the market needed was a safe, undramatic Budget. He could not risk having to embark on a U-turn similar to that following the self-employed national insurance mess from his last Budget and had to ensure that confidence in the UK’s ability to manage its finances was not undermined given the vulnerabilities generated by Brexit discussions. Did he manage to strike this balance? The jury is out, but the numbers suggest that dull and neutral Budgets could be the norm for the next few years.
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