Hammond's Titanic Challenge - An Edelman Analysis

HAMMOND’S TITANIC CHALLENGE BUDGET JOY BUT BREXIT ICEBERG REMAINS Craig Woodhouse Senior Director, Edelman

Philip Hammond woke up this morning to the kind of headlines Chancellors dream of.

His spend-happy Budget, promising the British people that “austerity is coming to an end”, contained enough giveaways to keep virtually everyone happy. Even Labour – while criticising the Chancellor for not spending enough – said they would keep his headline announcements on Income Tax cuts and extra money for the NHS. Plain sailing days like this don’t come around that often in the Treasury.

But the Budget was really only the tip of the iceberg that is Brexit. Indeed, the Chancellor admitted that what he said yesterday will change depending on the outcome of negotiations with the EU. Get a good deal and there will be yet more cash for Government departments in the form of a “double deal dividend” from ending uncertainty and freeing up rainy-day money. Crash out with no deal and there will likely be an emergency Budget in the Spring, with at least £15 billion tucked away to stimulate the economy.

In small print yesterday the financial watchdog the Office for Budget Responsibility said the Brexit vote has already weakened the economy, squeezing household spending and business investment. And it said a no-deal Brexit could have “severe short-term implications”. This was a Budget to give Britain a boost with the EU exit door now firmly in sight.

EDELMAN | SOUTHSIDE | 105 VICTORIA STREET | SW1e 6QT London | www.edelman.co.uk | 020 3047 2000 | @edelmanuk

Yesterday’s Budget marked the end of the David Cameron-George Osborne economic orthodoxy which has been in place since 2010. Gone was a relentless focus on austerity, replaced instead with a remarkable £103 billion spending splurge between now and 2023-24.

Philip Hammond was able to insist he is still sticking to fiscal “discipline”, because the deficit will fall below his target of 2% earlier than expected and debt will fall in every year of the forecast. But that masks the fact the deficit – the difference between spending and borrowing – will actually rise next year.

The Chancellor was able to turn on the spending taps largely because of a significant improvement in the state of the public finances compared to previous predictions. He was handed a £74 billion windfall from better jobs, borrowing and productivity numbers – and used it to fund a series of spending commitments.

Much went on paying for the £20.5 billion annual cash injection for the NHS which was promised in June. But he also used it to bring forward Income Tax cuts, increasing the amount people can earn before paying tax to £12,500 next year in a boost for 32 million workers.

There was £4.5 billion to smooth the introduction of Universal Credit, an extra £1 billion for the Ministry of Defence, another £6 billion for the National Productivity Investment Fund to pay for better transport and connectivity, £500 million more for Brexit planning, and a promise of real-terms increases for Government departments in next year’s Spending Review.

Some £900 million went on rates relief for small businesses, another £650 million on rejuvenating High Streets, a package worth £650 million to help councils with social care costs, and £475 million for schools to buy extra kit.

Given the positive reception much of this spending has got, you would think the Chancellor would be shouting it from the rooftops. But he, along with Treasury officials, have sounded lukewarm at best about the package. That is because it was forced on them to a large extent

by Theresa May’s declaration at Conservative Conference earlier this month that austerity is “over”. Make no mistake: this is a Budget born in Number 10 which reflects the Prime Minister’s desire to put improving people’s lives ahead of a slavish devotion to spreadsheet discipline.

It also reflects the shifting of the centre ground which has come from Jeremy Corbyn’s leadership of the Labour Party. Corbyn’s promises of nationalisations, tax rises and huge spending increases has presented an opportunity for the PM to shift away from austerity – and she has taken it despite Treasury opposition.

HAMMOND’S TITANIC CHALLENGE | OCTOBER 2018

theresa takes control

Despite business groups like the CBI and IoD welcoming the Budget, largely as a result of moves to increase the Annual Investment Allowance to £1 million, continue reforms to the Apprenticeship Levy, and increase infrastructure investment, there was a raft of new tax rises and consultations buried in the Budget that could have significant consequences for companies.

Analysis of the Budget Red Book reveals there were actually 19 tax increases announced yesterday, allowing the Treasury to raise £280 million more a year in tax by 2021-22 despite expensive personal Income Tax cuts, freezes to fuel and alcohol duties, and several other tax giveaways.

The tax rise announced to greatest fanfare was a 2% Digital Services Tax on major tech firms, set to raise £440 million a year by 2023-24. Although popular, this has been criticised for not going far enough to tax internet giants – and so is a prime target to be increased after consultation.

Other major revenue raisers included a crackdown on off-payroll working, where people are paid through companies rather than as employees. The Government is shifting responsibility for policing this on to private companies, and expects to raise £1.1 billion in 2020-21.

A reduction in the capital allowances for plant and machinery assets from 8% to 6% will raise more than £300 million a year; cutting Employment Allowance from big companies will raise around another £300 million a year; keeping the VAT registration threshold at £85,000 will raise £150 million a year; and a raft of measures on tax avoidance and evasion to raise more than £500 million a year. This includes a significant change on the rules around insolvency, making HMRC a preferred creditor, which will raise £195 million a year by 2022-23.

At least 23 consultations were announced in the Budget, with potentially far-reaching implications. They include the Digital Services Tax; a new tax on plastic packaging which does not contain at least 30% recycled plastic; proposals to force landlords to provide highspeed internet connections if requested by tenants; significant planning reforms to boost housebuilding; a consultation on the taxation of trusts and on Child Trust Funds; on Capital Gains Tax and Stamp Duty relating to residential property; limiting R&D tax relief for SMEs; and a breathing space scheme for people who fall into debt.

Of huge significance to major employers, the Government announced it will next year set a new remit for the Low Pay Commission – which makes recommendations on minimum wage rates – for the years beyond 2020. The Government has set an aspiration to “end low pay”, so this remit will be influential in the future speed of minimum wage increases.

Edelman’s Public Affairs team can help with responding to consultations and engaging with Government to protect and promote your business. To discuss how Budget measures might affect you, please contact Managing Director Will Walden on will.walden@edelman.com

EDELMAN | SOUTHSIDE | 105 VICTORIA STREET | SW1e 6QT London | www.edelman.co.uk | 020 3047 2000 | @edelmanuk

how they reacted Torsten Bell

Adam Smith Institute

Director of the Resolution Foundation

“This Budget was much easier for Philip Hammond than many expected.

But there will be tougher choices for Chancellors in the years ahead. Brexit must be delivered smoothly, public spending will remain tight, and forecasts may not always be so rosy.”

“What the Chancellor gave with one hand though, he took with the other as he hit firms large and small that make capital losses by restricting their exemptions— meaning less risk taking, less profit and fewer economic dividends… A digital revenue tax—lifted straight from the Corbynite playbook—will punish the millions of people who shop online and use online services every day.”

Carolyn Fairbairn Director General of the Confederation of British Industry

“There is no hiding from the dark clouds of Brexit uncertainty. The Chancellor has made clear that this Budget will need urgent attention in the event of ‘no deal’, showing yet again the seriousness of the situation and the need to get a good deal over the line.”

budget 2018 word cloud

Institute for Fiscal Studies

“The #deficit is down to pre-crisis levels.

Debt certainly isn’t.”

HAMMOND’S TITANIC CHALLENGE | OCTOBER 2018

stings in the tail