Bill Jamieson: Hammond watches his step despite tax boost

This Chancellor is more cautious than his predecessor. Photograph: Ben Stansall/Getty
This Chancellor is more cautious than his predecessor. Photograph: Ben Stansall/Getty
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Barely have we had time to digest the last two budget statements – the UK Autumn Statement barely three months ago and the Scottish budget in mid-December – than another one is upon us: Chancellor Philip Hammond will present yet more tax changes and more forecasts in his budget next Wednesday.

All this micro management has become a standard feature of modern life – though it seems to have little impact on our growth performance. But it is an opportunity to correct anomalies and address unforeseen spending needs. That said, it should by previous standards be a modest affair, with the package likely to comprise relatively small changes at the margin.

But it is just these small changes that can trip up chancellors – witness George Osborne’s “pasty tax” in the “omnishambles” budget, higher stamp duty levies on top-end properties and rises in insurance premium tax now deemed excessive.

More recently the UK government has been engulfed with protests over the rises in business rates effective from the end of this month.

So Hammond has some fine tinkering to do. But the main theme of his budget is likely to be the better than expected improvement in the public finances and the scope this might provide for extra spending on the country’s beleaguered health and social care services.

The budget deficit numbers saw an improved surplus in January compared with a year earlier. The figure is set to substantially undershoot the revised 2016/17 fiscal target in November’s Autumn Statement.

There was a surplus of £9.4 billion on Public Sector Net Borrowing excluding banks in January, up from a surplus of £9.1bn in January 2016. January is normally a bumper month for income tax receipts and the latest figures have been buoyed by a better than expected economic performance, stronger household spending and more people in work. Income tax receipts were up 6.1 per cent year-on-year in January, while corporate tax payments were up 5.4 per cent.

The total deficit for the first ten months of the 2016-17 financial year is £49.3bn, down more than 21 per cent on the previous corresponding period. And the deficit now looks headed for £56.2bn for the financial year as a whole – well below the Office for Budget Responsibility’s upwardly revised projection of £68.2bn in the Autumn Statement. It would also be down from the 2015/16 outturn of £75.4bn

All this suggests Hammond will have a little unexpected flexibility in the budget. But it is heavily hedged with caveats. For looking ahead, the public finances will be stretched given the probability of slowing growth this year, rising inflation biting into consumer spending power and Brexit uncertainties. Markedly higher inflation is pushing up government costs while higher interest rates are pushing up debt servicing costs.

We will hear much about the resilience of the UK economy since Brexit – Scotland, worryingly, is the exception: GDP growth here slowed to just 0.2 per cent in the third quarter, and the likelihood is that the year as a whole would have recorded growth of just 1.1 per cent. Nor does 2017 look any better. The Fraser of Allander Institute predicts growth of just 0.5 per cent this year and PricewaterhouseCoopers just 0.3 per cent.

In marked contrast GDP growth across the UK overall in 2016 has evened out at 1.8 per cent – fractionally lower than previously reckoned due to first quarter growth being revised down. But fourth quarter quarter-on-quarter growth was revised up due to industrial production and construction output being stronger than first estimated.

There was also an encouraging rebound in manufacturing output. And according to the CBI’s latest private sector growth indicator out last Friday, there was a further pick-up in the three months to February. This, it says, was largely driven by a rebound in consumer services, which saw the fastest growth in business volumes since August 2015. Retail sales and manufacturing output also grew at a solid pace, the latter mirroring its performance in the quarter to January.

With both the OBR and Bank of England having raised their forecasts for 2017, the Chancellor has good reason to strike a more optimistic note. But there is evidence that consumers are reining in their spending as their purchasing power is eroded by inflation. This fans concerns that 2017 is likely to be an increasingly difficult year. Global Insight economist Howard Archer says: “Like a slow puncture, we suspect that the economy will gradually lose air as the year proceeds.” He now forecasts that GDP growth will moderate to 1.6 per cent.

What then of likely tax changes? Bill Dodwell, head of tax policy at Deloitte, points out that we are in the middle of very substantial changes to the tax system, from Making Tax Digital, changes to employment taxes and changes driven by G20 and OECD protocols.

Corporate tax changes in the pipeline – limiting tax relief and the use of tax losses – are expected by the government to bring in over £1.8bn annually from April. Changes to employment tax will also bring in several hundred million pounds, as public sector bodies will take on responsibility for assessing whether services are provided by quasi-employees through their personal service companies, and many salary sacrifice arrangements cease to offer tax/NIC savings.

Making Tax Digital will bring a major change in the way that taxpayers, particularly small business and those renting out property, interact with HMRC. They will need to make quarterly returns of their income and expenses to HMRC. It was scheduled to apply from April 2018 for those with turnover over £10,000 per year.

Two important announcements are expected – the turnover threshold and whether the start date will be deferred for all or some of those affected.

“Such a radical change”, says Deloitte, “needs time for thorough testing and we hope that the final start date allows time for this.”

Meanwhile, acute pressures have been building on health and social care, and while Hammond may be able to announce a short-term cash injection, he may announce a major study into social care reform. As with the man himself, expect a cautious approach.