To add to a politically tumultuous 2017, in less than three weeks we have the second Budget of the year. The six months since the spring Budget have witnessed enormous political upheaval. The Conservatives have lost their majority, the Brexit negotiations are stuck in deadlock and the Prime Minster has been fundamentally weakened.
The post-mortem of the Conservative Party’s disastrous general election means the Chancellor is under increased pressure to ease the focus on austerity – both in tone and substance – as well as to spend on giveaways. He has also been drawn into uncomfortable debates over the timing and detail of preparations for a “no-deal Brexit”.
The economic environment is no less challenging than the political one. While higher inflation has boosted the Government’s tax take from VAT, with total tax receipts up 3.4% on last year, the OBR is reportedly preparing to cut its forecasts for the UK’s productivity to reflect the stubbornly low levels it has been stuck at since the last recession. This will make it much harder to meet the Chancellor’s stated objective of eliminating the budget deficit by 2025 without significant further spending cuts or tax rises.
Yet this Budget must at least make a start in tackling some significant political challenges. Conservative Party associations know that there is work to do to expand their appeal to young voters, i.e. ‘under-47s’. Societal change in the form of a decline of home ownership is a significant problem. Yet finding the money for a significant house building programme remains as difficult as it ever has.
The Chancellor may also seek to return to a message that got lost at the General Election; namely that, if anything, the Conservatives stand for (a degree of) economic competence in the face of socialist chaos. But this may not be enough. There is a risk that policies will be dismissed as ‘Corbyn-lite’ policies not satisfying party members or floating voters alike.
WA has cut through the latest rumours and political spin to give you a breakdown of the top policy, proposals and their likelihood.
Informal gu​ide to our scorecard ratings:
1 – 3 = political suicide, dead cat strategy, or would break the bank.
3 – 6 = average chance, with policy likely floated in the run-up on the Andrew Marr Show.
7 – 9 = expected to be in Budget, from a manifesto commitment or Government consultation.
10 = guaranteed.
Young person’s tax break
Around mid-October, after what seemed like a deliberate leak by the Treasury, the media was ablaze with suggestions that the Budget would address “intergenerational unfairness”. Whitehall sources were quoted, saying the Budget would be “bold” in attempting to “restack the deck for the next generation”.
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In policy terms, The Sunday Times reported that young people might benefit from the potential writing-off of student loans – an idea reportedly championed by David Davis – and building on the green belt. Low-tax champions, the Tax Payers Alliance, have argued for a rise in the starting age of employee national insurance from 16 to 26.
Politically, however, bold tax changes risk alienating the Conservatives’ over-47 core base. The media reception was frosty, even before these changes could come close to the Budget red box. The Sun described any punishment of older voters, such as slashing pension tax relief, as “political suicide”. The BBC even ran a “reality check” on whether it is “legal” to tax older people more.
Likelihood 5/10 – rhetoric around helping the young, but not a “big, bold Budget”
Public sector pay increases
NHS and social care leaders, unions, teachers have called on the government to go further than a partial lifting of the public sector pay cap (as with police and prison officers) and to scrap the 1% cap altogether. The IFS has found that loosening the cap would cost £6 billion more in 2019-20, which would be funded either by more borrowing or a squeeze on departmental budgets.
Against the growing chorus, the Chancellor is likely to put money into the services under most strain such as the NHS and prisons. The pay review body will report in spring 2018 for the NHS, so the Budget will likely present a recommendation for a rise without pre-announcing pay decisions for 2018-19.
6/10 – across-the-board public sector pay policy no longer applies, but expect “recommendations” for targeted increases that might be the basis for the Spring Statement in 2018.
House building spree
It is no secret that the Government is seeking to ramp up its house-building programme. Sajid Javid, the Communities Secretary, has said we should be building up to 300,000 home a year. When a Secretary of State appears on the Andrew Marr Show, with pre-planned precision, policies get floated to see if they can gain enough traction to force the Chancellor’s hand. Sajid Javid said that the Government should “borrow more to invest [to deal with the housing crisis]”. When asked if ‘spreadsheet Phil’ approved this, Javid replied, “Let’s see what happens in the Budget”. This could, perhaps, be funded by a planned £1bn raid on freelance workers, but this risks a repeat of the self-employed tax u-turn earlier this year.
6/10 – ending gazumping, help-to buy, and social housing are likely to be supported. Borrowing for more homes a politically ambitious stroke that goes against the grain of deficit reduction.
More capital funding for the NHS
While there are calls for additional funding to pay for scrapping the 1% pay cap, there are concerns that this won’t happen and NHS trusts will instead be required to meet the cost from their already over-stretched budgets. Hunt has said, after all, that Philip Hammond has made it clear to him that the NHS must “improve productivity” in order to receive extra resources.
More likely is in increase in capital funding for the NHS. The commitment could be in the region of £10 billion of extra capital resource by 2021 given that the Conservative Party pledged to back the Naylor review during the election campaign. Trusts may have to meet strict requirements on financial performance in order to receive any funding that is made available though.
5/10 – perhaps a focus on recruitment or a dry restatement of Manifesto spending pledges than any substantial spreading bonanza
Student repayment threshold increase
Theresa May touted a policy at Conservative Party conference to increase the threshold for when students begin paying off their student loans from £21,000 to £25,000. The policy was only pipped by the Help to Buy equity loan extension in showing just how much the Conservative top brass is down with the youth.
Given that it has been announced by Theresa May, it is very difficult for the party to back out of it. The really interesting point is that this will result in so many people not paying off their full fees that it will only save the Government £2-3 billion compared to the previous system with fees set at £3,000 a year. “£3,000-a-year” sounds a lot better than “£9,000-a-year but you’ll probably never pay the loan off within 40 years so the rest will be written off.”
8/10 – This would only have been a 5/10 had it not been so easily viewed as a Corbyn-lite policy that will cost some money and win no votes.
Further Universal Credit changes
At a very minimum there will be changes from the six week delay from the first payment being received to four weeks or even fewer. This has already been announced alongside the removal of the hotline fee.
What we’re interested in here is a further and potentially more dramatic change such as a move from monthly to weekly payments or the scrappage of the scheme altogether. Labour has been campaigning for a freeze in the roll-out and has put the Government under pressure during PMQs.
2/10 – The Government has already dug its heels in on this. If it was to change tack it certainly wouldn’t do it at the Budget. The platform is far too grand for a U-turn.
Freeze the planned rise in the personal allowance
Unfortunately all those lukewarm giveaways don’t come for free. Mel Stride, Financial Secretary to the Treasury, was snapped carrying a folder that seemed to indicate that the Government was planning to freeze the planned rises in the personal tax allowance from £11,500 today to £12,500 by 2021. In addition to this, the planned rise in the higher rate from £45,000 to £50,000 is also likely to be scrapped.
7/10 – The Chancellor desperately needs to make the figures add up and if there’s any way to do so, scrapping an expensive and yet to be introduced tax cut, that most of the public are probably unaware of, seems a sensible place to start.
Increase the carbon price floor
The Carbon Price Floor was first announced at the 2011 Budget and came into effect in 2013. It was introduced because the EU-wide Emissions Trading Scheme was deemed to have set too low a price to be effective.
Ministers have already acknowledged that it was not working as they hoped it would. It is thought that the price floor is too low to be effective and Hammond mentioned during the last Spring Budget that the levy control framework would be scrapped. Although he stopped short of mentioning a replacement until “later in the year”. He also put off changes to the carbon price. These changes are usually announced during fiscal events and this Budget remains the last opportunity this year for an announcement.
9/10 – Nothing is a dead cert in a Budget but this is about as odds-on as George Osbourne referring to his roof repairing ability during his Budgets. More than one Minister has also referred to this in recent weeks as if it is already a done deal.