By David Smith, Economics Editor of The Sunday Times
As in previous years, Reed Finance and Reed Accountancy invited me to give a post-budget presentation at the Merchant Taylors' Hall, just along the road from the Bank of England in the City of London. This one was unusual. Philip Hammond had announced in November that this would be the last of the spring budgets, to be replaced by a single unified budget each autumn.
This final spring budget (for now at least), was also, as I was able to demonstrate, a more modest affair than most of its predecessors. Its 28 individual measures compared with 77 a year ago. At 64 pages, the official budget "red book" was thinner than for many years. There have been plenty of occasions when the budget has run to more than 200 pages.
Partly this was the chancellor's deliberate choice to defer big decisions until the main event later in the year. Partly it was because he was determined to present a "steady as she goes" budget in the light of the uncertainties that lie ahead.
The two main uncertainties are Donald Trump's presidency and the Brexit process. On Trump, I argued that as far as America and the global economy is concerned, two conflicting forces arise from his presidency. The first is the growth-boosting effect of his $1 trillion infrastructure plan and proposed cuts in both income tax and corporate taxes. The president highlighted the infrastructure plan in his State of the Union address to Congress, and has pledged to reduce US corporation tax from 35% to 15% or 20%. Income tax would be cut across the board, from the present seven rates to three – 12%, 25% and 33% - with most of the gains targeted at middle and lower-income taxpayers.
Against this is the second force, the president's protectionism. He has pulled out of the Trans Pacific Partnership, and called for a renegotiation of NAFTA (the North American Free Trade Agreement), while threatening large tariffs on China and Mexico and exploring a new border adjustment tax. A protectionist president would be bad for Britain and the global economy.
Which of these two forces will win out? Markets have taken an optimistic view and expect the Trump presidency to provide a growth boost. The global economy is stronger than a year ago, when George Osborne warned of a "dangerous cocktail" of risks. So for the moment, the global economy appears to be set fair.
On Brexit, I set out where we are. The first stage, the initial political and economic shock, is almost over. The second stage, the invoking of Article 50, starts very shortly. The third phase, negotiating new trading arrangements with the EU and other countries, is some way away. So far, the economy has done well but there are challenges ahead. They will be made easier for business if the government ensures that the Brexit process is as transparent as possible, and if it takes action to improve the underlying performance of the economy, including by raising Britain's internationally low levels of productivity.
Hammond made clear in his budget that productivity was "at the very heart" of the government's economic plan and "the only sustainable way to raise living standards for people across the UK". The most useful measure in the budget on this was the government's initiative on technical education and training. The new "T-levels", with the aim of establishing parity of esteem, look to be one of the most important reforms undertaken by government in this area for many years, and will attract nearly £500m a year of extra funding. If successful, this initiative will respond both to long-standing skills' deficiencies in Britain – a cause of low productivity – and provide a source of home-grown talent to replace EU migrant workers.
The announcement builds on the £23bn National Productivity Investment Fund announced by the chancellor in November, and other productivity-raising measures. Though the effects will take years to come through and the scale of the policies s relatively modest, they represent useful steps in the right direction.
A second set of announcements from the chancellor was concerned with providing emergency funding to cope with the social care crisis - £2.4bn over three years – and £100m for more GPs within A & E departments, as well as measures to ease the burden of higher business rates. Though none of this solves the difficulties in these areas, they buy the government some time.
Most controversially, however, Hammond chose to pay for most of these giveaways by announcing a 1% increase in Class 4 National Insurance contributions in April next year with a further 1% increase in April 2019. He also announced a "business-unfriendly" reduction in the newly-established dividend tax relief threshold, from £5,000 to £2,000. The NI increase, which went against the Conservatives' 2015 manifesto pledges, was welcomed by independent experts, including the Institute for Fiscal Studies, but drew strong opposition from Tory backbench MPs and Conservative-supporting newspapers. How that plays out in the coming months will be the first big test of the chancellor's authority.
In the meantime, there is relief within government that the post-referendum economy has held up better than feared, but some disappointment that the independent Office for Budget Responsibility (OBR) has not changed its medium-term view of the economy. For business, apart from those directly affected by the NI and tax changes, this was a budget which, while including some useful measures, particularly on training, will be remembered as a modest affair, though one which generated some political heat. November may bring something more substantial, while business will be hoping that "steady as she goes" applies to the economy as well as the chancellor's budget.