David Smith, economics editor of the Sunday Times, summarise the key points for business from the Autumn Budget 2017.
As in previous years, Reed Finance and Reed Accountancy hosted a post-budget breakfast at which I spoke, followed a few hours later by a client lunch, at which I also spoke. The venue this time was the Devonshire Club in the City of London. This was the first of the Autumn budgets in the new timetable introduced by Philip Hammond, the chancellor, earlier this year.
The backdrop to this budget was one of considerable uncertainty. A series of unusual events, including Britain’s vote to leave the EU and the election of Donald Trump in America had made the outlook uncertain.
In spite of this, the global economy has gained strength, and is enjoying its strongest period of sustained growth since the financial crisis. International forecasters, including the International Monetary Fund and OECD, have revised their forecasts for world economic growth, as has the Office for Budget Responsibility (OBR), the official forecaster and fiscal watchdog.
One welcome aspect of the global economy, with a recovery expected to gain strength next year, is the fact that all regions of the world are looking stronger. This includes the eurozone, blighted by both the global financial crisis and its more recent crisis and recession, but now enjoying its strongest upturn for many years. World trade and global industrial production are also looking stronger and the IT cycle, measured by semiconductor billings, has also turned decisively higher.
In the main, for business this was mainly a budget to greet with relief that no further damage was done, rather than a cause for celebration.
The strength of the global economy is, for Britain, important. It limits the downside for the economy. It would be highly unusual for the UK economy to do very badly when the world is doing well. The global economy should thus limit the downside. Even so, the new OBR forecasts show a slowing economy even as the world economy is getting stronger.
The big economic story of the budget was the OBR’s decision to downgrade its assumption about future productivity growth. Growth in productivity – output or gross domestic product per hour worked – is essential for prosperity and crucial for the public finances. The OBR had previously assumed that productivity growth would recover to its pre-crisis average of 2% a year. Now, while it is still assuming a recovery, it expects a gradual pick-up to only 1% a year.
Growth prospects in coming years are thus subdued. Some of this reflects the weakness of business investment because of Brexit uncertainties, some of it the continued squeeze on household incomes, which will keep a lid on consumer spending. The result is that in coming years the economy is predicted to grow by 1.5% a year or less, the weakest official five-year forecast for many decades.
In response to this, Philip Hammond a net giveaway of £25 billion over five years. He was able to do this because technical changes, notably the reclassification of housing associations to the private sector, provided him with a windfall. That and the planned sell-off of £15 billion of Royal Bank of Scotland shares in the five years from 2018-19, allowed him to present a lower trajectory for government debt than in his March budget. Government borrowing will, however, be higher than previously planned, and the aim of balancing the budget by the mid-2020s is now officially regarded as a very long shot.
Politically, however, the budget was good for Hammond, removing the threat to his position, and was also good for the government after its recent difficulties. Though the course of the Brexit negotiations remains a source of great uncertainty, the government looks more stable than it did.
In terms of the individual measures, the budget included a range of announcements. There were the “sticking plaster” commitments, notably extra money for the National Health Service, £3 billion over two years for Brexit preparations and £300 million to ease the introduction of universal credit.
The centrepiece of the budget was a housing package which Hammond described as being worth £44 billion, though there was only £15 billion of new money. The most eye-catching of these was stamp duty exemption for first-time buyers of up to £300,000. The budget also provided for additional spending on housing-related infrastructure and allowed local authorities to borrow more to build council houses. Though well received, most housing experts are sceptical that it will boost housebuilding to the government’s new target (for the mid-2020s) of 300,000 a year. Other highlights included a populist freezing of fuel duty, and of most excise duties on alcohol.
Was it a budget for business? Businesses will welcome the fact that future increases in business rates will be linked to the consumer prices index (CPI), rather than the retail prices index (RPI) and that revaluations will happen more frequently. There was also a welcome increase to 12% in the R & D tax credit. Another £7 billion will be provided for the National Productivity Investment Fund, though not until 2022.
But some businesses will be adversely affected by the planned 4.4% increase in the national living wage next April. And, in the main, for business this was mainly a budget to greet with relief that no further damage was done, rather than a cause for celebration. The planned cut in corporation tax to 17% remains in place, despite speculation that it was under pressure. The VAT threshold will stay at £85,000, despite a recommendation from the Office of Tax Simplification that it be reduced to around £25,000. Speculation about further reforms to pension tax relief and increases in insurance premium tax came to nothing. Sometimes business has to be grateful for small mercies.