What headline-grabbing measure is Chancellor Philip Hammond likely to favour this week – the one by which this Budget will be defined?
“Phil the Builder” could well be the cartoon image on the newspaper stands should he bow to pressure to boost the housing sector – from a big lift to local authority housebuilding budgets to Stamp Duty relief for first-time buyers.
Or “Phil the Austerity Buster”, with bold plans to let rip with badly needed capital spending and infrastructure projects.
Or there’s “Phil The Youth Champion”, with measures to boost intergenerational fairness – from measures to ease student debt to further cuts in pension tax relief for the wealthy.
These are the themes many hope will figure prominently in the Chancellor’s statement on Wednesday. But it’s scale and degree that matters if any move on these fronts is to make a political impact. For to the Chancellor has fallen the task of easing the gridlock that grips the administration. To the man nicknamed Spreadsheet Phil for his dullness and propensity to fiddle with small amounts, the government now looks for a dramatic lift in its fortunes.
But there is a problem – or more accurately, three.
The first is that in the Autumn Statement only last year he committed the government to further reductions in government borrowing – to cut the structural budget deficit to two per cent of GDP by 2020-21 and to its elimination by the mid-2020s. Hammond would be loath to be remembered as the chancellor who threw in the sponge on fiscal rectitude.
Second, it is likely that the Office for Budget Responsibility will take note of Britain’s poor productivity and downgrade its medium-term forecasts for economic growth. That in turn would lower the expected growth in tax revenues and force up the budget deficit.
And third, there is the cloud of uncertainty over the outcome of Brexit negotiations. The longer the lack of progress in securing a deal, the greater the likelihood of a “no deal” departure – a resort to World Trade Organisation tariffs that, while nowhere as ruinous as Remainers insist, could hit sterling and trigger a capital exodus. So long as this uncertainty persists, any chancellor would need to keep some fiscal ammunition in reserve.
Now is thus not the time for big budget giveaways.
However, Hammond will probably cite the recent improvement in government borrowing as giving him some room to boost spending without driving a coach and horses through longer-term budget reduction targets.
If the April-September performance was replicated over the full fiscal year, public borrowing would come in at £42.4 billion compared with the shortfall of £58.3bn forecast by the OBR in the March Budget. Even allowing for some slippage, the budget deficit undershoot should give him some £7bn of wriggle room.
Meanwhile, the latest evidence of an improvement in UK productivity might cause any downgrade in growth forecasts to be more modest than feared. And, largely unremarked at Westminster, UK economic growth is accelerating. The National Institute of Economic and Social Research reckons growth recovered to 0.5 per cent in the three months to October, with the result that tax revenue forecasts may well prove too pessimistic.
So much for the upside. It is still likely that, because of debt constraints and Brexit uncertainties, the Budget will be relatively low-key and largely reliant on low-cost measures
So what might be on the Chancellor’s “To Do” list? Likely to be at or close to the top are measures to boost housebuilding and first-time buyer access. Local authorities may receive a lift in their budget allocation with the extra cash earmarked for new home building. Another possible measure is a temporary cut in stamp duty for first-time buyers.
Look out for measures to promote “intergenerational fairness”. These could include a cut in National Insurance Contributions for younger workers financed by restricting pension tax relief for older workers. Other proposals might include easing the burden of student loans or the difficulty of purchasing a first property. On pension tax relief, one possibility is to replace the current tax relief with a flat rate of relief of, say, 30 per cent. This will boost savings for basic rate taxpayers (typically the younger generation) at the expense of higher earners.
Expect further action on tax avoidance especially in light of the recent publication of the so-called “Paradise Papers”.
And then there is a likely uplift in capital spending, down to 2 per cent of GDP, below the level that prevailed before the financial crisis and taking gross fixed capital formation well below the G7 average. The result of cuts in capital spending can be seen in growing pressure on road infrastructure, crowded trains, the social housing shortage and overflowing hospitals.
For the business sector, there may be thin pickings. The Chancellor has been urged to lower the threshold at which small firms start to pay VAT from the current £85,000 to around £26,000 – a measure that would bring in an extra £1bn to £1.5bn for the Treasury.
There’s also a growing expectation that Entrepreneurs’ Relief will be attacked – as with any lowering of the VAT threshold this would prove highly unpopular with business owners and aspiring entrepreneurs.
However, the ire of business could be calmed by decisive measures to cut business rates, a move that would be particularly welcome in the beleaguered retail sector. The British Retail Consortium says retailers alone face a stark £270 million leap in their business rates bills next spring. Almost one in ten retail premises is vacant and ratepayers as a whole face a £1.2bn leap in their rates bills from April.
An ecommerce or Amazon tax might well be proposed to finance such a reduction.
Other measures to expect include a further increase in the personal allowance and standardisation in the use of differing inflation measures. Why is it that utility bills etc always seem to be justified by reference to the Retail Prices Index while the more widely used official measure of inflation is the (generally lower) Consumer Prices Index?
It’s just one example of the sort of small tinkering in which “Spreadsheet Phil” excels – but one that would be welcome next Wednesday.