Philip Hammond has played down the significance of the spring budget and denied he plans to surprise parliament with big spending plans or tax reforms.
This was always going to be a “just in case” budget, only bursting into life should the public finances need rescuing from a further slowdown in the economy. But the economy is performing strongly, even as it slows, leaving the chancellor to continue where he left off in the autumn statement: focusing on relatively limited measures to improve the UK’s infrastructure, skills and education.
Austerity will continue to drive down government spending to levels not seen since before the financial crisis, while the tax burden is on track to reach its highest level as a proportion of GDP in 30 years.
What does that mean for the public finances and the choices the chancellor has before him?
The economic outlook
Growth
The Office for Budget Responsibility (OBR) – the Treasury’s independent forecaster – is expected to take an optimistic view of the short-term growth prospects, possibly raising the target from 1.4% this year to nearer the Bank of England’s 2% forecast. This could prove controversial. Critics say the recovery from the Brexit vote is built on consumer spending, which is about to face a squeeze from slowing wages growth and higher inflation. The OBR may also be forced to downgrade last year’s growth from its own estimate of 2.1% to the Office for National Statistics’ 1.8%. In March last year the OBR forecast 2017 growth at 2.2%.
Wages
How much the OBR expects wages to slow will be crucial. Average annual pay slipped in the final three months of 2016 from 2.7% to 2.6%, according to the latest figures. The most recent report for the Bank of England showed that average wage rises could slip from 2.7% down to 2.1% by the end of the year. Slowing wages growth would rob the economy of its main engine.
Inflation
Until now the OBR has said it expects this year’s inflation rate to be no more than 2.3% and then to peak at 2.5% in 2018. However, these forecasts are now among the lowest around and are likely to be revised upwards amid strongly rising food and petrol prices – probably to 2.6% this year.
Business investment
The OBR has always believed business investment will return to pre-crisis norms, whatever the evidence. It has mostly been wrong. But it is unlikely to drop its optimistic forecasts at such a delicate political moment, ahead of the article 50 negotiations, and risk accusations from Brexit campaigners that it is supping with the remain camp. It was forecast in November to remain negative this year, but pick up dramatically for the rest of the decade.
Trade
The lower pound means exports are likely to pick up and imports to decline. The OBR in November was considered by some to be conservative in forecasting a 0.3% increase in net trade this year. The new estimate could be higher.
The public finances
Deficit
Viewed from the economic depths in November last year, the forecast for this year’s government’s budget deficit will look rosy. The spending shortfall could be as much as £12bn less than previously feared, reducing the forecast budget deficit for 2016-17 from £68bn to about £56bn. This would offset upward revisions to borrowing over the next five years that the OBR said followed the decision to leave the European Union. Extrapolated over the next four years, it could put up to £40bn more in the chancellor’s pocket than he expected in November. The Resolution Foundation has pencilled in a conservative £29bn.
Social care and the NHS
Social care has suffered a series of cutbacks, especially to local authority provision, despite rising need. Hammond is expected to loosen the purse strings, but possibly only to get him through the next six months before announcing a more substantial review in the autumn. Increases in NHS England’s budget, which amount to about 11% in real terms by 2020, are partly offset by cuts in other spending by the Department of Health. It is this cut – which ministers claim can be achieved by efficiency savings – that keeps spending in check.
Business rates
This is based on commercial property rents and raises about £29bn. Hammond is under pressure to dampen the effects of a business rates revaluation, delayed from 2015, that will send bills in London and the south-east rocketing. Figures from the Valuation Office Agency show businesses in London face an average 23.7% rise in their business rate. Treasury sources indicate that the chancellor will adjust the complicated business-rate capping regime to make life easier for the worst-affected, but will refuse calls for a complete rethink.
Income tax
The government wants to raise the income tax personal allowance to £12,500 and the higher-rate threshold to £50,000 by the end of this parliament. In April the personal allowance will rise to £11,500, and the basic rate limit will be increased to £33,500, meaning that the effective threshold for the 40p rate becomes £45,000.
Inheritance tax
Osborne’s inheritance tax giveaway, which will allow estates with gains from property sales to pass on an extra £175,000 tax-free on top of the existing £325,000, is another costly item for the chancellor to endorse. The new rates will be phased in by 2019-20. Under rules allowing spouses to receive a tax-free inheritance from their deceased partners, children will then be able to receive £1m tax-free.
Whitehall departments
Hammond has demanded further cuts amounting to £3.5bn, or 6%, by the end of the parliament. This sum is in addition to departmental cuts already going through the system and £12bn of welfare cuts targeted at housing benefit and tax credit claimants, which will deliver real-terms cuts in every year and maintain the combined cost of these two benefits at £50bn until 2019-20. The Treasury says there are efficiency savings to be made by the police and other government services. But the Institute for Public Policy Research thinktank says many of the savings are illusory and cuts will hit frontline services.
Education
Theresa May has revealed plans for a new generation of free schools and grammar schools costing £320m. Meanwhile, schools in England face the first real-terms cuts to their funding since the mid-1990s, with spending per pupil due to fall 6.5% by 2019-20. The Institute for Fiscal Studies said cuts to sixth-form and further education funding will mean funding for 16- to 18-year-olds is no higher than it was almost 30 years ago.
Skills and trainingIn the autumn statement last November, Hammond said he wanted to rebalance spending towards long-term infrastructure projects. An apprenticeship levy on large employers comes into effect in April, which will bring £3bn into the exchequer. This money is supposed to go back to employers that carry out training, but initially it will be banked by the Treasury. Also, a new category of technical qualifications called T-levels will be introduced in an effort to improve skills in the British workforce and boost productivity. Hammond said an extra £500m would be made available by 2022 to improve the quality of training in schools and colleges and offset the loss of foreign workers after Brexit.
Self-employment
In recent years self-employment has become synonymous with low pay and insecure employment, driven by firms seeking to cut their tax bills. Employers pay no national insurance when they commission work from someone who is self-employed and such workers pay a reduced rate of 9%, compared with the 12% paid by PAYE staff. Hammond could raise about £1bn from increasing the national insurance rate for the self-employed to 12%.
