Borrowing for Brexit

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Chancellor Philip Hammond made his first, and it emerged last, Autumn Statement today as he set out how Brexit would affect the public finances and British economy.

The Chancellor praised the economy’s unexpected strength and resilience but the reality is that growth after this year is down, borrowing will increase and inflation will soar. The Chancellor praised his predecessor briefly but buried him even more swiftly, declaring that times had moved on. The Government has abandoned its surplus target and will be borrowing £32 billion more than expected in 2020-21 alone. Debt will now peak at just over 90% of GDP, the potential tipping point where it starts to undermine growth. A large part of this is due to Brexit, which is knocking 2.4 percentage points off growth by 2021. The result is that a public finances surplus is now planned “as soon as is practicable in the next Parliament”. Hammond also tweaked Osborne’s fiscal rules.

It was fairly steady-as-she-goes in many spending areas. Departmental spending will rise only in line with inflation, the pensions triple lock will stay until the next Parliament, and there will be some more money for the NHS and prisons.

On the other hand, part of Osborne’s agenda will continue in new forms – new investment, and an economy that works for everyone. It is here that Hammond focused his new borrowing.

Jams today – but pain tomorrow

As widely predicted Hammond announced a range of measures for those who the Prime Minister had called the “just about managing” (JAMs).

Hammond confirmed previously announced measures such as the increase in personal tax allowances, and an increase in the living wage. Furthermore, he announced a reduction in the taper rate for universal credit, which is in effect a targeted tax cut for 3 million low-paid workers.

There was action on the cost of living, also previously a concern of his predecessor. The Chancellor announced that the planned fuel duty rise has been cancelled. Also letting agents fees will be abolished, there will be a crackdown on whiplash claims to lower car insurance premiums and a crackdown on pensions cold calling. Also the Treasury will look at the functioning of key markets, with retail energy singled out.

However this all comes with a sting in the tail, and that is soaring inflation. The Chancellor referred to this but did not give figures, these are buried in the document. The reality is that Consumer Price Inflation will rise from 0.7% this year to 2.5% in 2018, declining to 2% in the years after.

No easy ride for business

Hammond praised Britain’s business led recovery since 2010 and stressed that Britain remains open for business. The good news is that he will stick to existing plans to reduce corporation tax to 17%, he will cap Carbon Price Support and will continue to review business rates and to increase the transitional relief and also increased rural business rate relief. Other measures to back business will include the doubling of export finance capacity and additional support for venture capital and a review of access to patient capital.

On the other hand business will face new taxes and costs. These included aligning of the employer and employee National Insurance rates, as well as an increase in Insurance Premium Tax from 10 to 12%.

He also highlighted the “rapid change in the tax base”, referring to the growth of self-employment as well as the use of benefits in kind. Payment through incorporation will therefore be subject to review as will the differences between cash earnings and benefits. Furthermore there will be more measures on tax avoidance and evasion. So for businesses, as for consumers, the downsides of this Statement may be felt for some time.

Perhaps most significant was the sense that politicians are more wary of multinationals now. Hammond referred to “concerns that the pitch is tilted in their favour”.

Austerity relaxed – high value investment

Hammond claimed that where there is additional spending this will be used to fund investment which would help to close Britain’s productivity gap with other major economies.

He announced:

  • A new National Productivity Investment Fund with £23 billion for innovation and infrastructure over 5 years
  • New investment in research and development reaching £2bn a year by 2021
  • Additional £1.1 billion transport investment, roads and railways, digital signalling, £390 million on low emission vehicles and autonomous vehicles
  • An ambition for the UK to be a world leader in 5G, investing over a billion in digital investment to catalyse private investment
  • Increased Government support for housebuilding, releasing public sector land and a £2.3bn housing infrastructure fund to support 100,0000 new homes, and also £1.4bn to deliver 40,000 additional affordable homes
  • The Help to Buy scheme will also continue and right to buy for Housing Association tenants will be piloted on a large scale.

And finally: the last Autumn Statement

Hammond announced that there would be no more Autumn Statements. In future there will be one major fiscal announcement a year, which will be an Autumn Budget. Although, to some amusement, he said there would be Spring Statements going forward, responding, as mandated, to Office of Budget Responsibility forecasts, but with no major new announcements.

For more information please contact Burson-Marsteller UK Head of Public Affairs Stephen Day at Stephen.Day@bm.com

Photos CC/Yazzy H

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