A surprising Budget…
A crackdown on non-doms, a significant increase in the tax take and the introduction of a national living wage, it is entirely justifiable to ask if this really was the first Conservative Budget since 1992? With a wide range of policy initiatives, the Chancellor has moved quickly to set the economic agenda for the next 5 years but many of his proposals were from a new playbook.
…with slower spending cuts and higher taxes…
As promised the reduction of the Government’s deficit continues to take centre stage but spending is to be cut at a slower rate than promised in either the March Budget or the Conservative Party Manifesto. At the same time, the range and scale of tax rises over the life of the Parliament including taxes on insurance premiums, a new vehicle excise duty regime, a bank profit tax, removal of renewable energy tax breaks and further squeezes on pension tax relief was unexpected. In total, the tax take is likely to rise by £6.5 Billion in 2020. The result is a smoother profile for spending reductions allowing the achievement of surplus in 2019, a year later than previously signalled.
…though some things were as expected…
Despite the surprises in some areas, the widely expected squeeze on welfare was a key feature of the Budget with reductions in housing benefits, tax credits and a range of in work benefits. The IFS characterises these policies as being regressive and likely to impact the poorest third of households disproportionately hard.
…but the Chancellor pulled a few rabbits pulled out of the hat in his latest “rebalancing”…
The most significant surprise was the announcement of a national living wage of £7.20 an hour in 2016 and increasing to at least £9 by 2020. The OBR estimates this might cost 60,000 jobs and will cost employers around £4 Billion. The Chancellor positioned this as balancing the reduction in welfare as a way to ensure work pays…making Britain a “high wage, low welfare” economy. However, the IFS suggest that there are significant differences between the groups being impacted by welfare cuts and those likely to gain from the national minimum wage with low earners the biggest losers.
The Chancellor also plans to balance the impact of higher wage costs on business through a reduction in the rate of corporation tax to 18% by 2020 down from today’s rate of 20%, which is already the lowest in the G20. There will also be an increase in the Enterprise Allowance to reduce the impact on employment costs. Nevertheless this is a major shift in policy that will impact wage levels and may, based on early reaction, prove very challenging for small businesses to absorb without an impact on employee numbers.
…though the productivity story has yet to be told…
The introduction of the national minimum wage appears to be the first move in the Chancellor’s plan to improve productivity. More details of this plan will be provided in due course, but the Budget also contained moves to boost spending on roads, an apprenticeship levy, the devolution of further powers to the regions and the creation of a permanent annual investment allowance of £200,000.
It is difficult to comment on these initial proposals without seeing the full plan. The pressure on margins created by the national minimum wage may cause businesses to seek productivity gains but it may not. The other measures are helpful but do not appear of the scale likely to drive a rapid transformation in performance. Business certainly needs to see a more detailed plan to be able to judge its likely effectiveness.
…which is a major concern as it is the key to success.
The OBR’s forecast illustrates just how important productivity is. The base case forecast to 2020 sees GDP growing at around 2.4% a year through the period. This is hardly runaway growth and yet it is based on productivity improvement of just under 2% per annum on average. If however productivity stays stuck at the levels achieved in recent years, GDP growth will be closer to 1.6% per annum, a reduction of a third form the base case.
When we consider that the OBR forecasts the UK will fall over £300 Billion short of the £1 Trillion of exports in 2002 and that the growth of 2.4% will come about in part due to an increase in household debt to income to over 170% – higher than at the time of the financial crisis – it is clear both how important productivity is and how vulnerable the UK remains to shocks.
Not the Budget business expected or wanted.
This is a difficult Budget for business to analyse as there are some major policy initiatives but these are designed to a large extent to balance out. However, over £12 Billion of welfare cuts and £6.5 Billion of tax rises by 2002 will take demand out of the economy and slow the pace of growth according to the OBR. There are some incentives for business in the budget but prior to seeing the details of the productivity plan, it would seem as though the Budget has not created the environment in which we can expect a surge in business confidence or investment.