The success of a Budget is judged in three stages: the initial Commons and media reception after the Chancellor sits down; the number of Treasury climbdowns when the Finance Bill makes its way through Parliament; and the impact on the British economy several years later.
In his first Budget as Chancellor of the Exchequer, Philip Hammond completed the first leg of his relay with aplomb – and a surprising dose of good humour.
There were implications for Scotland, with a review into supportive taxation to help the struggling North Sea oil producers, as well as £350m of additional funding under the Barnett formula.
At first glance, there is much to praise the Chancellor for. Hammond eschewed the temptation for a Budget giveaway despite mayoral elections being only weeks away. Instead he used the Office for Budget Responsibility’s announcement that borrowing has fallen by £16 billion to reaffirm his commitment to fiscal responsibility. Meanwhile, without additional borrowing he dedicated much needed investment to social care, schools and infrastructure.
The chief talking point of this Budget will almost certainly be the Chancellor’s decision to increase National Insurance contributions for the self-employed. The rationale for the policy change seems clear: it will address the increasing casualisation of work caused by the gig economy; it will address the annual cost of reduced National Insurance for self-employed people which is rising to unsustainable levels; and will mainly affect the higher paid.
However, as we have seen before, bad optics can ruin sensible policy – and the perception of a broken manifesto promise delivering increased taxes on entrepreneurs has already drawn the ire of some elements of industry and the press during Hammond’s lobby briefing.
While the Chancellor was quick to praise the OBR’s announcement about lower borrowing, the long term outlook is not looking so rosy. Growth (readjusted up for this year) was downgraded for next year, even to the extent that the economy is actually expected to be smaller in 2020 than at the Autumn Statement 2016. Meanwhile, employment may be up, but wages are down and rising inflation is just around the corner – and the Government hasn’t triggered Article 50 yet.
In short, Hammond may be about to learn that it is in the “long tail” of a Budget where the real problems occur. If optics don’t wreck this Budget during the second leg of the race, then Brexit and the economy could well do so in the third.
Summary of key announcements –
The OBR now forecasts GDP growth of 2.0% in 2017, falling to 1.6% in 2018, before rising again to 1.7% in 2019, 1.9% in 2020 and 2.0% in 2021.
Inflation forecast to rise to 2.4% in 2017-18 before falling to 2.3% and 2.0% in subsequent years
The fall in sterling over the course of 2016 is expected to push inflation to 2.4% in 2017 and 2.3% in 2018, before falling back to 2.0% in 2019, meaning a deceleration in consumer spending.
Outlook for the public finances
Annual borrowing £51.7bn in 2016-17, £16.4bn lower than forecast
Borrowing forecast to total £58.3bn in 2017-18, £40.6bn in 2018-19, £21.4bn in 2019-20 and £20.6bn in 2020-21
Public sector net borrowing forecast to fall from 3.8% of GDP last year to 2.6% this year, then 2.9%, 1.9%, 1% and 0.9% in subsequent years, reaching 0.7% in 2021-22. But borrowing still predicted to be £100bn higher by 2020 than forecast in March 2016
Debt rose to 86.6% of GDP this year, but will fall to 79.8% in 2021-22
A tax avoidance clampdown totalling £820m to include action to stop businesses converting capital losses into trading losses, tackle abuse of foreign pension schemes and introduce UK VAT on roaming telecoms services outside the EU, and a new financial penalty for professionals who create schemes defeated by HMRC
Review of taxation of North Sea oil producers
Infrastructure / science and technology / devolved
£250m in funding for Scottish Government
£200 for Welsh Government and £120m for Northern Ireland Executive
£16m for 5G mobile technology and £200m for local broadband networks
£270m for new technologies such as robots and driverless vehicles
Personal taxation / self-employed
From April 2018, the Government will raise (Class 4) NIC payments for self-employed people from 9pc to 11pc – raising £145m a year by 2021-22
This will raise £145m a year by 2021-22 at an average cost of 60p a week to those affected
Personal tax-free allowance to rise as planned to £11,500 this year and to £12,500 by 2020 (rUK)
Reduction in tax-free dividend allowance for shareholders and directors of small private firms from £5,000 to £2,000 from April 2018
Previously announced new NS&I bond will be available from April and will pay 2.2pc on deposits up to £3,000
Funding of £5m to support people returning to work after a career break
Alcohol, tobacco, gambling and fuel
A new minimum excise duty on cigarettes based on a packet price of £7.35
No increases in alcohol or tobacco duties on top of those previously announced
Vehicle excise duty rates for hauliers and the HGV Road User Levy frozen for another year
Education and skills
£300m of the National Productivity Investment Fund (NPIF) to support 1,000 new PhD places and fellowships in STEM (science, technology, engineering and maths) subjects
New T-Levels to be introduced to give parity of esteem for technical education (rUK)
£5m committed to project to celebrate the centenary of women first getting the vote, and to educate young people about its significance
Health and social care
An extra £2bn for social care over next three years, with £1bn available in the next year
Long-term funding options to be considered but so-called “death tax” on estates ruled out
Sugar tax set at 18p and 24p as expected – but will raise less cash than expected
New funding totalling £20m to support the campaign against violence against women and girls