If it is March, then there must be a Budget, with all the bits and pieces that entails. Normally at this time of year many in business are anxiously leafing through the Budget small print, just to check that there are no nasties in there to affect them. This year, of course, there was no Budget, but instead the first ever Spring Statement. There was still plenty of small print, even if there were no new policy announcements, and Philip Hammond managed to stretch his House of Commons speech to longer than the expected 15 minutes.
What did it mean for business? The headlines from the chancellor’s statement, apart from the possible phasing out of copper coins, were all about a modest upward revision to this year’s growth forecast, and a small downward revision in government borrowing. The changes were, however, small. An upward revision to this year’s growth forecast from 1.4% to 1.5% makes little difference to the business outlook – with the bigger picture still pointing to several years more of weak growth – and the downward revision to the budget deficit, to £45 billion for this year, suggests the government is still running up plenty of red ink.
For things of interest to business, it is necessary to dig a little deeper. REED clients are always interested in the labour market and the verdict of the official forecaster, the Office for Budget Responsibility (OBR) is interesting. Essentially it thinks that the UK employment miracle, which has been responsible for more than 3 million net new jobs since 2010, is over.
Employment will rise a little further, from 32.2 million this year to 32.7 million by 2022, but at a much slower pace than in recent years. Unemployment, current 4.4%, is projected to rise a little.
Some of this is down to slow growth but some is explained by demographic and other factors. In recent years what is known in jargon as the participation rate – the proportion of people of working age who work or want to work – has increased. The OBR expects it to level off or decline, because of a rising proportion of older people in the population. Tie that to the expected drop in EU migration, which is already happening, and skill shortages and recruitment difficulties are likely to persist.
The official forecaster does not, it should be said, expect a pay bonanza in spite of this. Average earnings growth is predicted to slow to 2.5% or below in 2019 and 2020, after 2.7% this year, alongside still subdued productivity and continued economic uncertainty. Though some people got excited about a rise in productivity – output per hour – in the second half of last year, the OBR thinks this was another flash in the pan. Productivity growth is forecast to rise only slowly to 1% or so a year, half the pre-crisis norm, and then not until 2020.
The other macro topic of interest to business is investment, and the prospects for it. For many businesses, this has become a key question: when will the uncertainty, particularly around Brexit, have lifted enough for “normal” business investment to resume. The answer, according to the OBR, is that the business investment environment will remain tepid for some years to come. After 1.7% growth this year, it expects a gradual pick-up to 2.5% in coming years. If that does not sound too bad, remember that a couple of years ago, expectations were that business investment would be rising at 6% or 8% a year by now. At some stage, smart firms will be able to steal a march on competitors by investing early. That stage has not yet been reached.
There was, as noted, small print in the chancellor’s statement, some of which could become important in future. The next revaluation for business rates’ purposes has been brought forward from 2022 to 2021 and will occur at three-yearly intervals from then on.
More money was allocated for various purposes, including £95 million for full fibre broadband in 13 areas, and a doubling to £220 million in support for smaller housebuilders. £80 million will be released to support small firms in engaging an apprentice. Amid fears that the £1 million lifetime allowance for pensions would be scaled back, it will be increased by 3%, in line with inflation. The national living wage will also be increased, to £7.83 an hour from April 1.
There was also a glimpse into the future, Hammond using his sprig statement to launch a series of consultations. Of these, apart from a proposed tax on single-use plastic containers, two stood out. One was the possibility of lowering the VAT registration threshold from its present £85,000. The government’s Office of Tax Simplification has suggested that the threshold, one of the highest in Europe, discourages micro businesses and the self-employed from expanding their turnover beyond that point. The chancellor appears to agree, but the backlash from the self-employed, including white van man, will be something to behold if he were to decide to lower the threshold to £43,000 or even £26,000. The latter would raise an extra £2 billion a year.
The chancellor also appears to extract more tax from the tech sector, both by taxing giants such as Facebook and Google on revenues rather than profits and allowing the taxman to delve into the profits people make by using platforms such as eBay and Airbnb. He needs the money. The question is whether he will be able to get it.