At the Reed Accountancy & Finance annual Budget Breakfast, held on October 30 at the Merchant Taylor’s Hall in the City of London, David Smith presented both about Philip Hammond’s budget and Brexit.
The economics editor of the Sunday Times began by describing the central message of the budget. This was that the chancellor had been presented with a windfall of improved government borrowing forecasts by the official fiscal watchdog, the Office for Budget Responsibility (OBR), and had chosen to use that windfall to fund extra public spending, mainly on the NHS, and tax cuts. The budget was thus bolder and more interesting than expected. As well as announcing that the government was moving towards the end of austerity and confirming a big increase in NHS spending, Hammond also announced that there would be no new PFI (private finance initiative) contracts.
In the detail of the budget there were job market measures, including an increase in the national living wage from £7.83 to £8.21 an hour next April, money to ease the introduction of universal credit, and reforms to the apprenticeship levy.
The chancellor also announced some help for the beleaguered high street with £900m of business rate relief for independent retailers but Smith doubted whether this would significantly ease retailers’ difficulties.
Other interesting budget measures included a proposed digital services tax in 2020, to raise £400m a year, and a welcome attempt to boost business investment by raising the capital allowance from £200,000 to £1m.
The challenge, said Smith, was to break out of the current period of weaker growth – which has seen Britain move from the top to the bottom of the G7 growth league – which reflected weak business investment and a squeeze on consumer spending. Even after the measures announced in the budget, the OBR only expects growth to average 1.5% a year over the next five years, low by past standards. Even in the context of weak growth, the Bank of England was likely to raise interest rates further, though only gradually, taking them from the current 0.75% level to around 2%, with the next increase not coming until after Brexit in March next year.
Guests at the event were positive about the budget. Asked via live poll whether it was a good budget for business, around 60% thought it was, with a similar proportion thinking it would be good for jobs.
In each case only a tiny proportion thought that the budget was bad. There was also overwhelming support for the chancellor’s strategy of prioritising extra spending on the NHS and tax cuts over achieving a budget surplus.
Smith then moved on to Brexit. Leaving the EU, he said, was proving to be a very difficult divorce, with Theresa May under pressure from Conservative supporters not to give ground. Public opinion remained deeply divided on Brexit and, while support for a second referendum has grown, it remained unlikely.
There were, even at this late stage, a range of possible Brexit outcomes, which included a withdrawal deal and an agreement to negotiate a future agreement along the lines of the prime minister’s Chequers proposals, a disruptive no-deal Brexit, and the extension of Article 50. There was, he pointed out, great determination within government to avoid a no-deal Brexit, because of its damaging and disruptive effect on the economy, business and individuals. Most MPs want to avoid no-deal, he pointed out and, while the chances had grown, a deal was still more likely than no-deal, although perhaps not until the 11th hour.
Smith quoted the REED Big Question survey, which showed that many businesses were unprepared for Brexit and barely better informed about it than they were two years ago.
Brexit would pose big challenges, he said, even with a deal, but it would also create opportunities. The economy would change, and it was important to be on the right side of the opportunities.
The depressing thing about the Brexit process was that, in the absence of a no-deal outcome, it was likely to drag on for some years. A long transition – longer than the currently planned 21 months -would give firms more time to adjust but could prolong some uncertainty.
A lively question and answer session concluded the event. Smith was asked about the future of the City of London and about what firms should do to prepare for Brexit. The City, he said, would remain comfortably the biggest financial centre in Europe but it could lose some activity to the EU. Firms should work to ensure that they retain talent, particularly EU talent. They should also take note of the government’s no-deal notices as they affect their sector. In time, the decision for business will be when to invest to take advantage of an easing of some of the current huge Brexit uncertainty.