T:NE BRIEFING 28 - Budget 2013

thinking: BRIEFING 28 Budget 2013

RELEASE DATE: March 2013 Please direct any questions or comments regarding this paper to: New Economy Tel: 0161 237 4257 E-mail: hannah.hatton@neweconomymanchester.com

THINKING NEW ECONOMY: BRIEFING 28

Budget 2013

SOURCE:

HM Treasury

RELEASE DATE:

March 2013

SUMMARY: As has been the norm since 2008, the Budget was set against a backdrop of deep economic difficulties, with the latest forecasts from the Office for Budget Responsibility (OBR) seeing growth halved and a rise in borrowing. However, expansionary measures were offered in this budget and there was a strong signal that whilst fiscal policy will remain constant, a more activist monetary policy is going to be used to take more of the strain, which already has the fingerprints of the Bank of England’s new Governor on it. There were big announcements on housing and infrastructure investment and the various tax measures will be welcomed. Markets have reacted positively to a broadly “steady as she goes” statement which, despite expansionary measures and supply side reforms, was fiscally-neutral. The corollary of that is deeper departmental cuts, albeit with school and hospital budgets protected. This leads to the June spending review being about how public money is spent, or not spent in the remarkable case of the £11bn Whitehall underspend the Budget reallocates.

GM’s deep public services reform work is exactly about better directing this spend to increase growth and reduce dependency. The need for a credible plan to reduce the deficit is undeniable. However, there is short-term room for manoeuvre given the UK remains a large and productive economy. More stimulus would help set the country more firmly on the path to sustainable recovery. The Budget’s measures, which seem to recognise that principle, do not go far enough, and accentuate the risk of looking back at this period as the type of “lost decade” that Japan saw in the 1990s.

Introduction The OBR confirmed the UK’s continuing poor economic performance, its forecasts halving GDP growth for 2013 to 0.6%, although avoiding a second quarter of negative growth that would mark a triple dip recession. 1.8% growth is predicted for 2014 and 2.3%, 2.7% and 2.8% for 2015-17 – highly optimistic. The national debt is forecast to rise to 85% of GDP and not start coming down until 2017/18. This is taken as evidence of the need for stimulus, which is part-financed through further central government cuts. With BIS amongst the worst hit (the MoD and CLG complete the trio), skills and higher education funding is likely to be trimmed. Overall, departmental spending will be reduced by £1.1bn in 2013/14 and £1.2bn in 2014/15, an additional 1% saving. This is after an £11bn underspend this year, meaning that despite the largest fiscal contraction of modern times, almost 2% of funding available to Whitehall Departments has not been spent.

The Spending Review The next spending review, where allocations are made to policies and departments, is due on 26 th June, and will determine spending for the years from April 2015. The Budget nudged up the savings to be made there from £10bn to £11.5bn. Of this, £5bn will come from efficiency savings, and the themes will be growth, efficiency and public service reform, including localism and fairness.

Monetary Policy Since 1997 the Bank of England has been independent and working to an inflation target of 2%. The Budget signalled the start of a process that may change that, in line with the appointment of Mark Carney as its new Governor. Although “flexible inflation targeting” is explicitly not a move to targeting GDP, it does mark a move away from the European norm and more towards the US model, where the Federal Reserve has the twin objectives not just of maintaining price stability (inflation) but also of ensuring maximum employment. The Fed has committed itself to holding interest rates at their record low until an unemployment threshold is met, a policy pioneered by Carney in Canada.

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Housing - “Help to Buy” There were significant announcements on housing, adding up to some £5.4bn of support, £1.3bn of it in 2013/14. ‘Help to Buy’ has two key elements, both for houses of up to £600k. First, it extends 'First Buy' by providing equity loans worth up to 20% of the value of a new-build home, for anyone. Second is a mortgage guarantee for lenders who offer mortgages to people with a deposit of 5-20%, whether new build or existing, from January 2014. ‘Help to Buy’ may have a big impact in GM. While First Buy only supported 231 GM households in the first half of 2012, this higher-profile scheme is likely to be used by many more home buyers: the HMT estimate suggests perhaps 7,500 in GM. This would significantly boost the construction sector. Part of this is the likely impact of the mortgage guarantee, which could potentially help several thousand households into home ownership by enabling them to access 95% mortgages, otherwise unobtainable. Two caveats are firstly whether lenders will take up the offer, as borrowers with only a 5% deposit still represent a risk, and secondly macroeconomic effects, as the scheme is another American import, resembling Fannie Mae and Freddie Mac, which recently required a massive bail out. The key question is whether the UK Government will similarly end up with a share of domestic mortgages in properties whose value has decreased. Despite this sturdy subsidisation of the private housing market, the established fundamentals of slow, mediumterm decline in UK house prices are unlikely to change. Whether or not this intervention is deemed a success will be seen in those prices and in how much money finds its way into new builds.

Other Housing There was help for social housing tenants trying to buy, by reducing the qualifying period from 5 to 3 years and doubling the existing affordable homes guarantee, potentially helping around 750 GM residents. An extension to ‘Build to Rent’, expanded from £200m to £1bn, will provide more equity loan finance to support nascent private rental sector institutional investors. There is strong demand and an active “market making” pilot for this in GM, and this should help a second tranche of sites be brought forward more quickly. The spending review will set social rental policy to 2025, providing longer-term assurance for a market. Additional high-quality private rental stock would contribute significantly to GM and aid the move towards the private rental market experienced since 2008, with more people already privately renting than renting through social housing. At least £750m of the Help to Buy and Build to Rent funding to 2015 is guaranteed for London, through devolution to the Mayor.

Planning The Budget also contained announcements on planning, with a further drive to reconfigure planning to increase housing supply. Greater use of price information to ensure the right land is allocated for housing and employment growth was highlighted, and GM will be asked to put in place bespoke progrowth planning policies and delivery arrangements as part of a new Local Growth Deal, part of the Heseltine agenda that the Budget confirmed is being adopted.

Heseltine and the Community Budget The intention to implement Lord Heseltine’s proposals was reiterated, including the creation of a “Single Local Growth Fund”, devolved to local areas like GM, with funding allocated to LEPs on a competitive basis through “multi-year plans for local growth”. These will be operational from April 2015. Initial details like the size of this “Pot” will be announced in the spending review - although trailed elements like “some housing funding” and (already committed) “major local transport schemes” do not augur well in this ongoing battle between political activism for devolution and stubborn civil service resistance to serious change to the status quo. Though noted and praised, Community Budget remained stubbornly separate from all this. The Budget confirmed plans for a new multi-agency network to drive the transformation of local public services, which will be based in London and Manchester. This will spread community budgeting innovations and be a vehicle for the six evidential “What Works” centres being established, one of which is in New Economy’s speciality area of local economic growth. Yet, whilst the mood music on all of this is good, there is as yet next to nothing that will definitely change.

Infrastructure Capital investment plans were increased by £3bn a year, an additional £18bn, with details in the 3

spending review. However, despite shovel-ready schemes waiting, this is only from 2015/6. Following Lord Deighton’s assessment of Whitehall’s inability to deliver infrastructure projects “a step change in its approach” is set out, although the Government will only “consider options” for using more independent expertise. The Budget flagged investment in Junctions 12 to 15 of the M60, the Northern Hub and Manchester’s High Speed 2 link. Broadband got the nuanced mention of a “re-profiling of funding”, disappointing for GM, which has £20m plus European funding allocated but unspent because of state aid issues. The role of 4G in delivering high-speed mobile broadband was flagged.

Low carbon From April 2013, the carbon price floor announced in 2011 will come into effect, which, like the current Energy Bill, is supportive of investment in low carbon electricity generation. The support available for low carbon investment was tripled, to £7.6bn a year. Another attempt to move forward with two Carbon Capture and Storage projects was announced, as was a generous new tax regime to incentivise “fracking”. CLG’s response to a 2012 consultation on energy efficiency requirements will be published by May 2013.

Business Supply-side reforms to help businesses create jobs have been a consistent narrative of recent budgets, and Budget 2013 led with a 1% cut in corporation tax, to 20%, from April 2015. This is the G20’s joint lowest, although significantly higher than the 12.5% in Ireland, one of GM’s main inward investment competitors. A new annual £2k employer’s reduction in national insurance costs for new hires was also a headline, and should have a marginal impact on GM firms’ hiring decisions, especially micro businesses. £1.6bn was husbanded for industrial strategy, with 11 key sectors identified, of which aerospace, life sciences, professional and business services, information economy, education, and nuclear are particular GM strengths, although not recognised by central government as such funding to date has entrenched existing imbalances favouring London and the South East. The UK Bank for Business Investment was announced again, and there was a £300m scheme to expand lending to businesses, £75m for a Business Angel Co-investment fund and an extension to Enterprise Capital Funds. There is no sub-national breakdown to any of this funding. The value of government procurement spent through the Small Business Research Initiative will be increased 500%, and new “growth vouchers” are aimed at helping small firms seek advice on how to expand. There is tax relief for investment in social enterprises, and stamp duty on shares traded on growth markets like AIM is scrapped, incentivising larger firms to seek market investment instead of banks. London gets its own UKTI unit to co-ordinate the work of various Departments to advance the interests of the City of London’s financial institutions.

Tax, Welfare and Pensions The Budget confirmed personal allowances will rise to £10k from 2014, increasing wage packets all round and lifting some 120k GM residents out of tax altogether. The introduction of the new flat-rate pension (of £144 a week) was accelerated, to 2016. The £72k cap on social care costs was announced, also for 2016, meaning the threshold for means-tested help for residential care will rise from £23k to £118k. Sorrows though can be more cheaply drowned, as beer duty was cut by 1%. The 3p fuel duty rise planned for September was scrapped. The amount employers can loan staff interestfree for items such as travel season tickets doubles to £10k. In a move that will sting local and central government officers, the “progression pay” that has enabled pay increases to continue despite an attempted “pay freeze”, is to be reformed. The pay cap itself, now 1%, is extended another year.

Airport Passenger Duty was increased, to a maximum of £388 per ticket, a significant impediment to airports outside London that could increase growth through adding routes.

Childcare, Skills and Employment A significant measure was a new tax-free childcare scheme. This will start, somewhat lackadaisically, in Autumn 2015, and pay for 20% of annual childcare costs, up to £1,200 per child (to age 12). It will be available to all families with working parents not already receiving similar support and earning up to £150k each. An additional £200m childcare support will be wrapped into Universal Credit. On skills, a consultation on the implementation of the Richard Review into apprenticeships was announced.

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