Cautious Chancellor delivers safety first Budget … apart from the self-employed

10 March 2017

By John Hawksworth

The Brexit vote has not yet had a major negative effect on UK economic growth, but there are still many uncertainties ahead. So it was not surprising that the Chancellor chose to deliver a ‘safety first’ Budget in which giveaways on social care, vocational education and business rates relief were broadly offset by tax rises for the self-employed and other measures. While the Budget appears safe from an economic perspective, however, the rise in tax for the self-employed has sparked a political backlash.

The Office for Budget Responsibility (OBR) revised up its 2017 GDP growth forecast from 1.4% to 2% and revised down its public borrowing estimate for 2016/17 from around £68 billion to only around £52 billion (see table below).

Comparison of key OBR forecasts

Real GDP growth (%)

2016

2017

2018

2019

2020

2021

Autumn Statement (November 2016)

2.1

1.4

1.7

2.1

2.0

2.0

Budget (March 2017)

1.8

2.0

1.6

1.7

1.9

2.0

CPI inflation (%)

           

Autumn Statement (November 2016)

0.7

2.3

2.5

2.1

2.0

2.0

Budget (March 2017)

0.7

2.4

2.3

2.0

2.0

2.0

Public sector net borrowing

(£ billion)*

2016/17

2017/18

2018/19

2019/20

2020/21

2021/22

Autumn Statement (November 2016)

68

59

47

22

21

17

Budget – excluding new policy measures (March 2017)

52

55

39

20

22

17

Budget –  including new policy measures (March 2017)

52

58

41

21

21

17

*Excluding borrowing of public sector banks.

Source: OBR

However, both the OBR and the Chancellor were keen to stress that this large short-term borrowing downgrade was mostly due to one-off factors that had little impact on the medium-term outlook for the public finances. Indeed, some of the borrowing was just shunted into 2017/18 due to timing effects, with the result that the deficit is actually projected to rise slightly next year to £58 billion (or £55 billion if you exclude the extra money for social care, business rates relief and other net giveaways in 2017/18).

On a medium term view, extra economic growth in 2017 will be offset by slightly slower average growth over the following three years, so the OBR’s estimate of the overall level of GDP in 2021 is more or less unchanged from what it projected in November. The same is true of the budget deficit, which is still projected to be around £17 billion in 2021/22, the last year of the forecast period.

In summary, the OBR does not expect the recent relatively good news about the economy and the public finances to last. In particular, it expects higher inflation linked to the weak pound to cause a marked deceleration in real consumer spending growth from around 3% in 2016 to just 1.8% in 2017 and only around 1% in 2018. The OBR expects some offset from stronger net exports due to a more competitive currency, but not enough to stop overall UK GDP growth moderating to below trend rates of around 1.6-1.7% in 2018 and 2019. This would, however, be only a modest slowdown not a recession.

Giveaways in short term, but proposed tax rises for self-employed spark political backlash

The Chancellor did find around £3 billion extra for social care and the NHS over the next three years and a total of around £0.5 billion of business rate relief spread over the next four years, with both of these giveaways being front-loaded in 2017/18. Both areas, however, will require more fundamental reform in future, as the Chancellor recognised by launching consultations on these topics.

There was also a welcome injection of cash to support enhanced technical education for 16-19 years, which is an area where the UK has long lagged behind countries like Germany, as our latest Young Workers Index report made clear. Raising the UK’s game in this area will be even more of a priority after Brexit if this leads to restrictions on the freedom of skilled EU workers to move to the UK.

But, once you get beyond 2017/18, these giveaways were offset by increases in national insurance contribution (NIC) rates for the self-employed and a reduced tax-free allowance for dividends. The NIC rises on the self-employed have proved particularly politically contentious as they appear to break a pre-election manifesto pledge, although there is a sound economic case for them in terms of starting to level the fiscal playing field between employed and self-employed workers. In retrospect, the Chancellor may wish he had started with a consultation on different options for reforming the taxation of the self-employed in order to prepare the political ground for a more comprehensive package of changes in his November Budget or later. Indeed, it now seems that legislation on the NIC rise will be delayed until the autumn to allow time for more discussion.

Overall, the medium term net impact of the Budget measures on public borrowing was close to zero, and we would also not expect any noticeable impact on economic growth from the new announcements in this Budget. More significant decisions were postponed until the Chancellor’s first Autumn Budget in November.

The Chancellor will be hoping that the uncertainty surrounding Brexit will not dampen growth in 2018-19 as much as the OBR forecasts, in which case the public finances could improve faster than projected. If this happens, the Chancellor may be able to afford either tax cuts or spending rises later in the Parliament. Or he might achieve his longer term aim of a balanced budget sooner than expected. But it is far from guaranteed that the Brexit negotiation process will go smoothly, so the Chancellor was prudent to adopt a relatively cautious approach for now, at least in areas other than the NIC rise for the self-employed.

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This is a slightly extended version of an article originally published on the Tax Journal website here

John Hawksworth:
Read profile | Contact by email | Tel: 020 7213 1650

 

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