British chancellor of the exchequer Philip Hammond’s third budget on Monday is due to be his last before Brexit, and comes amid an impasse in the negotiations between the UK and the EU.
Amid this uncertainty, Mr Hammond will at least be able to bask in a substantial upgrade to the public finances that will allow him to back prime minister Theresa May’s pledge this month to end austerity.
The better-than-expected state of the UK deficit after years of austerity is important: Mr Hammond needs to present a safety-first Budget that does not create more difficulties for the government as it struggles to finalise a Brexit deal with the EU.
1. The chancellor’s main message
Mr Hammond will seek to convince the public that his prudent handling of the economy is responsible for the brighter outlook for the public finances, enabling him to deliver on Mrs May’s pledge in June to increase funding for the National Health Service in the next few years while also cutting borrowing and lowering the debt burden.
He will hold out the prospect of further dividends ahead if the UK secures a good Brexit deal, but will signal that some big tax rises are needed in the medium to long term to fully end austerity in public services.
2. State of the public finances
Mr Hammond is set to receive the best news that the Office for Budget Responsibility has given to any chancellor since its creation in 2010. Having recognised its tendency for excessive pessimism and the buoyant tax receipts in 2018-19, the UK fiscal watchdog is poised to say in the budget that borrowing this year will be about £13 billion (€14.6 billion) lower than it predicted in March.
So the UK deficit is expected to be about £24 billion in 2018-19 rather than the £37 billion previously forecast, and the £13 billion upgrade is likely to persist until the end of the OBR’s forecasting period in 2023-24.
This gives Mr Hammond the ability to postpone major tax rises that would otherwise be needed to finance Mrs May’s funding boost for the NHS.
3. Economic growth forecasts
Forecasts for economic growth and inflation are expected to undergo very limited revision in the budget compared with the chancellor’s spring statement. The OBR is likely to mark down growth for 2018 from the 1.5 per cent predicted in March by only a tenth of a percentage point, but could offset that with a small upgrade to the 2019 forecast.
Crucially the OBR is not expected to change its assessment that the economy cannot grow faster than 1.5 per cent a year without generating inflationary pressure. It is also due to warn that all of its figures are based on a smooth UK departure from the EU, so a no-deal Brexit could derail its forecasts.
4. The NHS and ending austerity
Mr Hammond will pencil in £26 billion of additional funding for the NHS by 2023-24, but he will not take final decisions on the spending totals for other Whitehall departments until after a Treasury review next year.
However, as part of the ending austerity message, Mr Hammond is likely to indicate in the budget the amounts that departments could get following the review. He could also announce extra funding to smooth the introduction of universal credit, the government’s troubled welfare reform for poorer working families.
5. Some limited tax changes
Do not expect large tax increases in the budget: these would be extremely difficult to get through parliament because the Conservatives do not have a majority in the Commons.
Smaller measures are likely, such as bringing more small companies within the value added tax regime, raising tax on offshore gambling groups and scaling back a jobs subsidy scheme involving cuts in employers’ national insurance bills.
6. Defanging the Faangs
Digital companies are squarely within Mr Hammond's sights. Facebook, Apple, Amazon, Netflix and Google – the so-called Faangs – do significant business in the UK but pay very little corporation tax.
Mr Hammond believes this highlights a flaw in the international system and has pledged to rectify it with a UK tax on digital companies’ revenues if a global agreement to resolve the problem is not reached soon. The budget could be the moment when he sets out a timetable for the tax.
7. Targeting the self-employed
Mr Hammond suffered the humiliation of having to drop plans in his March 2017 Budget to make self-employed people pay more national insurance after running into strong opposition from Tory MPs. So he is likely to proceed cautiously with any reform in this area.
Some contractors in the private sector are in the line of fire because Mr Hammond thinks they are working as de facto employees, and therefore should be paying more national insurance. The government is likely in future to levy taxes on them as if they were employees.
8. Curbing pension tax relief
If Mr Hammond wanted to raise a lot of more revenue, he could turn to pension tax relief, which costs the Treasury about £25 billion a year. But there is little chance Mr Hammond would want to end the overall system because the Treasury has found little enthusiasm for major reform.
However, if the chancellor wants to raise taxes a little, he could cut the annual and lifetime pension contribution limits.
9. A new plastics tax
Single use plastic – a major source of pollution – is likely to attract a tax in the Budget. There is significant public support for a measure, and Mr Hammond committed in August to setting out his plans on plastic in the Budget.
10. The budget joker
Mr Hammond has the fiscal headroom to proceed with the Conservatives’ 2017 election manifesto pledge to raise the tax-free personal allowance to £12,500 and the point at which the 40 per cent higher rate kicks in to £50,000.
If these thresholds were then frozen, the tax cut would turn into an increase by the end of the parliament due to the impact of inflation. This could raise billions in revenue by 2022 for Mr Hammond.
– Copyright The Financial Times Limited 2018
