The main points from Philip Hammond’s Autumn Statement.
The Chancellor said today’s statement, which came exactly five months after the Brexit vote, recognised there was an “urgent” need to tackle long-term weaknesses in the British economy, “where every corner of this United Kingdom is part of our national success”, as he announced an extra £800 million of funding for the Scottish Government.
We have chosen to borrow to kick-start a transformation in infrastructure and innovation investmentPhilip Hammond
He said the UK government would “maintain our commitment to fiscal discipline, while recognising the need for investment to drive productivity and fiscal head room to support the economy through the transition”.
The Chancellor also confirmed that the national living wage will rise from the current level of £7.20 an hour to £7.50 in April, and said that negotiations were beginning to create a “city deal” for Stirling “so that every city in Scotland will be on course to have a City Deal”.
He added: “The major increase in infrastructure spending I’ve announced today will represent a significant increase in funding through the Barnett formula of over £250m to the Northern Ireland Executive, £400 million to the Welsh government and £800 million to the Scottish Government.”
But the scale of economic uncertainty caused by Brexit was laid bare as the Chancellor unveiled a series of plans aimed at boosting productivity and helping low-income workers amid his goal to get the economy “match fit” for the “new chapter” ahead.
Along with the rise in the national living wage, he confirmed a freeze in fuel duty and measures to ease cuts to universal credit.
But the Office for Budget Responsibility (OBR) slashed growth forecasts for next year and predicted higher than expected borrowing, forcing Hammond to confirm he was abandoning predecessor George Osborne’s plan to achieve a budget surplus.
Growth forecasts for next year were cut from the 2.2 per cent predicted in March to just 1.4 per cent as a result of the vote in June’s referendum, the Chancellor said.
“That’s slower, of course, than we would wish, but still equivalent to the IMF’s forecast for Germany, and higher than the forecast for growth in many of our European neighbours, including France and Italy,” Hammond said.
He added: “There is one tax reform the government has pursued since 2010 to improve the lot of working people. Raising the tax-free personal allowance. When we entered government in 2010 it was £6,475. Now, after six years it is £11,000, and will rise to £11,500 in April.
“As a result, we have more than halved the tax bill of someone with a salary of £15,000 to just £800. That’s a massive boost to the incomes of low and middle earners.
“And I can confirm today that, despite the challenging fiscal forecasts, we will deliver on our commitment to raising the allowance to £12,500, and the higher rate threshold to £50,000, by the end of this parliament.”
The Chancellor said the 23 June vote to leave the European Union will “change the course of Britain’s history” and “makes more urgent than ever the need to tackle our economy’s long-term weaknesses” including the productivity gap.
The OBR forecast growth this year to be 2.1 per cent, higher than the 2 per cent forecast in March, but it will fall to 1.4 per cent next year before recovering to 1.7 per cent in 2018, 2.1 per cent in 2019 and 2020 then 2 per cent in 2021.
Hammond told MPs that government borrowing would hit £68.2 billion this year and £59bn next year, compared with the March forecast of £55.5bn and £38.8bn.
A new draft charter for budget responsibility has three fiscal rules – return public finances to balance “as early as possible in the next parliament”, with cyclically adjusted borrowing below 2 per cent by end of this parliament; public sector net debt falling as a share of GDP by end of parliament; and welfare spending within a cap. Hammond said the government has no plans for further welfare savings in this parliament.
Public sector net borrowing (PSNB) is expected to fall from 4 per cent of GDP last year to 3.5 per cent this year, continuing to fall and reaching 0.7 per cent in 2021/22.
Cyclically adjusted PSNB is set to be 0.8 per cent of GDP in 2020/21, while debt is expected to rise from 84.2 per cent of GDP last year to 87.3 per cent this year, peaking at 90.2 per cent in 2017/18 then falling to 89.7 per cent in 2018/19.
Underlying debt peaks this year at 82.4 per cent of GDP then falls to 77.7 per cent by 2021/22. Additional borrowing will be used to invest in infrastructure and innovation to raise UK productivity.
Explaining why he was abandoning Osborne’s target, Hammond told MPs: “In view of the uncertainty facing the economy, and in the face of slower growth forecasts, we no longer seek to deliver a surplus in 2019/20.
“But the Prime Minister and I remain firmly committed to seeing the public finances return to balance as soon as practicable, while leaving enough flexibility to support the economy in the near term.”
His new draft charter for budget responsibility would commit the government to returning the public finances to balance “as early as possible in the next parliament”.
In the interim, borrowing should be below 2 per cent and public sector net debt should be falling as a share of GDP by the end of the parliament in 2020. Welfare spending would be kept within a cap set by the government and monitored by the OBR, he added.
As part of his measures aimed at making the economy “match fit” for Brexit, Hammond confirmed a series of infrastructure spending plans, including a new £23bn national productivity investment fund to be spent on innovation and infrastructure over the next five years, additional investment in research and development, rising to an extra £2bn per year by 2020/21, a £2.3bn housing infrastructure fund aimed at delivering up to 100,000 new homes in high-demand areas and £1.4bn made available to deliver 40,000 additional affordable homes.
Other measures include an additional £1.1bn investment in English local transport, including pinch points on strategic roads, digital signalling on railways and low emission and autonomous vehicles, and investment of more than £1bn in digital infrastructure and 100 per cent business rates relief on new fibre infrastructure.
The Chancellor said: “We have chosen to borrow to kick-start a transformation in infrastructure and innovation investment. But we must sustain this effort over the long term if we are to make a lasting difference to the UK’s productivity performance.”
Hammond said he had told the National Infrastructure Commission to make plans on the assumption that the government would invest between 1 per cent and 1.2 per cent of GDP in economic infrastructure every year from 2020.
Public spending this year will be 40 per cent of GDP – down from 45 per cent in 2010. Departmental spending plans set out in the 2015 spending review will remain in place, with expenditure to grow in line with inflation in 2021/22.
The £3.5bn of efficiency savings announced at the Budget will be delivered in full, the Chancellor said, adding that the government will meet commitments to protect budgets for key public services, defence, overseas aid and the pension “triple lock” until the end of this parliament.
He also confirmed that the rate of corporation tax will be reduced to 17 per cent as planned. For the oil and gas sector, the carbon price support will be capped until 2020 and business rates reductions worth £6.7bn will be implemented.
Hammond set out a range of tax hikes, including a crackdown on “unfair” salary sacrifice schemes that are used to reduce levies on employee benefits.
From April 2017, he said he would align the employee and employer National Insurance thresholds at £157 per week, costing firms up to £7.18 a year for each worker. He also announced a hike from 10 per cent to 12 per cent in insurance premium tax from next year.
Announcing a squeeze on salary sacrifice schemes, Hammond said: “The government will take action now to reduce the difference between the treatment of cash earnings and benefits.
“The majority of employees pay tax on a cash salary. But some are able to sacrifice salary and pay much lower tax on benefits in kind. This is unfair, and so from April 2017 employers and employees who use these schemes will pay the same taxes as everyone else.”
Hammond also announced a further crackdown on tax dodgers as part of efforts aimed at raising about £2bn over the Autumn Statement forecast period.
Confirming that Whitehall spending squeezes will continue, Hammond said plans set out in 2015 would remain in place. The £3.5bn of efficiency savings announced at the Budget are to be delivered in full, but departments that meet their targets would be able to reinvest £1bn of efficiency savings in priority areas in 2019/20.
Tax savings on salary sacrifice and benefits in kind will be stopped, with exceptions for ultra-low emission cars, pensions, childcare and cycling.
The government will raise £630m by removing tax benefits of disguised earnings for the self-employed and employers, while measures to crack down on inappropriate tax avoidance will raise about £2bn over the forecast period. Efforts to stop multi-nationals avoiding tax will raise £5bn from the largest businesses in the UK.
As expected, universal credit taper rate will be cut from 65 per cent to 63 per cent from April – at a cost of £700m – as part of a package to help the “just about managing” people – known in Whitehall as the “Jams” – who Prime Minister Theresa May has identified as a priority for support.
Along with a consultation on how to ban pension cold-calling, a new investment bond will be launched through National Savings & Investments, with an interest rate of 2.2 per cent to help two million savers.
Hammond also said that the Autumn Statement will be abolished and next year’s Budget will be the last held in spring. Starting in Autumn 2017, the annual Budget will be held in the autumn and subsequent spring statements will not be “major fiscal events”.