Look to the future for UK autumn budget

The UK's second budget statement of the year, scheduled to be delivered by the Chancellor of the Exchequer (the UK's term for its minister of finance) on Wednesday 22 November, will probably not contain much in the way of surprise.

The days are long gone when the Chancellor (currently the Right Honourable Philip Hammond but not for much longer if rivals in his own political party have their own way) went into virtual purdah for weeks before making his budget statement to the House of Commons (the UK national government's lower chamber).

In the 21st century a combination of leaks on the one hand, successful industry lobbying, well informed guesswork and official government announcements ensures that the world will have heard much if not all of the content ahead of delivery.

We plan to carry an extensive news and comment service here on Wednesday starting from around 12.15pm when the Chancellor will be nervously waiting to be called from the front bench to the dispatch box to begin his statement.

Current UK Chancellor of the Exchequer, Philip Hammond

Aim of the budget

The aim of the budget was once upon a time purely arithmetical. Its purpose was to set how the government plans to raise the money it needs to finance its principal objectives as were once outlined in the autumn statement (that has now been switched to spring just as the budget is switched to autumn).

Much more is demanded of it in the modern world. However unpromising the financial reality, the Chancellor is expected to produce a statement that will boost government morale, save the prime minister (and the Chancellor himself), and deliver party unity.

The budget must also satisfy the quite different needs of private sector businesses, public service institutions and around 66m people making up the estimated population of the United Kingdom of Great Britain and Northern Ireland.

No pressure then Mr Hammond. Speaking of the United Kingdom, the spectre of Brexit will hover over the budget as it hovers over every other single aspect of life in the country today.

Genevieve Moore, head of corporate tax at chartered accountants Blick Rothenberg, says: “With Brexit in the background, businesses of all sizes are facing a period of uncertainty and challenge, and it is up to the government to calm the waters.

“This should start now with a reassuring and simple budget,” she says.

Genevieve Moore, courtesy of Blick Rotherberg

Likely specifics

With the context firmly in place, we can now turn our attention to the likely specifics of what will happen in relation to tax and spending as the government fights to cling on to the office it occupies courtesy of Northern Ireland's Democratic Unionist Party.

Budget statements usually feature many if not all of the following: changes in taxation (usually increases), details of existing and new allowances, broad spending commitments, deficit reduction and borrowing plans.

On the revenue side, the following will certainly feature: income tax, fuel tax, value-added tax (VAT), excise duties on alcohol and tobacco, stamp duty on residential property, inheritance tax, pensions, record employment rates, national insurance, and savings in departmental budgets.

Drink producers, tobacco manufacturers, estate agents, house conveyancing firms and personal estate planners will all be watching with keen interest.

Acknowledging the OBR

The Chancellor will need to acknowledge that the Office for Budget Responsibility (OBR) recently announced that it had revised its own projects for current and future growth.

Having acknowledged them, he will then promptly ignore them to all intents and purposes. Movements in sterling and inflation are a given. As are trends in deficit reduction and the national debt.

On the spending side, we will hear about plans for the NHS, education, research and development, infrastructure (probably focusing on HS2, HS3 and Crossrail 2), backing business and the freezing of fuel duty.

We will hear little or nothing about the postponement of previously announced infrastructure projects to build new roads, or to improve and link up existing ones. Unless the cuts are to be hailed as proof of budgetary discipline.

Credibility, community, opportunity

In the ground in between we will likely hear much talk of credibility, community, opportunity, efficiency, value for money, fairness and sustainability.

The NHS, incidentally, is projected to cost £149bn in the current year, compared with £119bn in the 2009-10 budget statement. Education is costing £102bn, compared with £88bn.

The biggest single major item of expenditure is 'social protection', which includes welfare and pensions. The projected cost of social protection in the current year was £245bn, compared with £189bn in 2009-10.

But the Office for National Statistics has produced figures for actual spend rather than projected spend. These show that £264bn was spent on welfare in the fiscal year ending April 5 2017.

Of this, £111bn, 42%, was accounted for by state pension payments. We are not predicting that this will change this week. But at some point, whoever is Chancellor will find it impossible to resist raising the pension age still further and cutting the real value of the payments.

Industrial strategy and cutting edge technology

Industrial strategy, cutting edge technology and innovation, with the UK leading the world on both these fronts and others, are sure to make an appearance. Along with 'highly skilled workforce'.

The current Chancellor is said to be obsessed by increasing productivity - the amount of output per hour worked. Before the global financial crisis this grew at an average of around 2% a year.

But the recent output of the OBR includes negative predictions on productivity which are scheduled to be published as part of the blizzard of additional documents that traditionally accompany the budget statement itself.

In any event, economic commentators are increasingly calling into question the way in which productivity is calculated. The changes in working patterns as automation replaces some jobs completely and reduces the cost of others cannot be ignored.

But understanding of the implications and their fiscal and monetary impact remains limited.

Crucial to support improved productivity: KPMG

It is crucial that significant emphasis is placed on measures that will help support improved productivity performance within the UK, says accountancy and professional services giant KPMG in a recently issued report.

“It is possible that Brexit deals a significant blow to productivity, as the country’s international links and access to talent come under strain. But, at the same time, enhanced productivity is the only answer to helping the UK avoid a weakened economic future.

“The Budget should therefore focus on investment in the economy’s long-term future, by prioritising measures that encourage improvements in productivity across all parts of the UK,” says KPMG.

Income tax

The headline rates of income tax are unlikely to change. The current personal tax-free allowance of £11,500 a year should rise to £12,000 in the next fiscal year (starting April 6 2018) and £12,500 the following year.

The Chancellor could be tempted to shelve those commitments by his immediate predecessor George Osborne. He could also be tempted to shelve the planned £2,000 increase to the higher rate allowance.

A problem, though, is that the difference in income between poor people receiving only the standard rate allowance and rich people benefitting from the higher rate is already starting to look low by historic standards.

Income tax, introduced as a temporary measure to help finance the Napoleonic Wars, is the single biggest contributor to the Treasury. The spring 2017 budget pencils in £175bn of income tax receipts for the current tax year.

Dividend tax

The tax-free dividence allowance introduced by George Osborne at £5,000 a year has already been cut to £2,000 by Chancellor Hammond in his spring budget this year. It could disappear entirely.

VAT

Some hard line monetarists think Chancellor Hammond should follow the example set by Geoffrey Howe in the 1981 budget. He almost doubled the standard rate of VAT, raising it to 15% from 8% (the luxury rate also rose to 15%, from 12.5%).

Repeating that is impossible. But there is a strong argument for pushing the rate up to a pips-squeezing level of 25%.

Given the economic illiteracy of vast swathes of the UK population, the general understanding of the impact of indirect taxation is even poorer than the understanding of direct taxation.

Richard Stone, courtesy of The Share Centre

Richard Stone, chief executive at The Share Centre, identifies increased support for financial education as one of a number of measures he would like to see. The government should set aside more funding for a comprehensive programme of education in schools, he says.

“Nearly 80% of our customer base indicated that they had no financial education at school and almost three quarters consider themselves entirely self-taught,” he adds.

VAT, incidentally, has become the UK government's second-biggest revenue earner. It is expected to raise £143bn in the current fiscal year. This could rise if the Chancellor significantly reduces the £85,000 annual turnover threshold at which it becomes compulsory to register and collect VAT on his behalf.

National insurance

National Insurance is understood by few who pay it, but it is the third-largest moneyspinner the government has. Its contribution to revenue in 2017-18 is expected to be £130bn.

Chancellor Hammond's embarrassment following his aborted attempt to make changes to the way that self-employed people pay it could well reduce any temptation to revisit it.

Stamp duty

Stamp duty on residential property was once a minor administrative irritation. Constant tinkering over the past few years means it has become a significant contributor to the Treasury.

Her Majesty's Customs and Excise calculates that stamp duty raises around £8bn a year. Anyone hoping for wholesale reform and simplification is likely to be disappointed if reform and simplification will reduce revenue.

There is, however, anecdotal evidence emerging from the front line of the UK residential property market that the large sums payable in stamp duty are deterring some would-be buyers from buying.

HMRC's website shows that stamp duty on a house selling for £1m is £43,750. If the cost of stamp duty on a house purchase is equivalent to the cost of extending an existing property to suit changing family needs, some homeowners will extend rather than move.

If this blip becomes a trend it will conflict with government's longstanding policies to encourage house building and house buying. What is his expected pledge to build 300,000 new homes a year worth if stamp duty brings the market to a grinding halt?

Fuel tax

The Chancellor looks set to further demonise diesel drivers, with new measures to tax vehicles more heavily, notes the petrolprices.com website.

This is being presented as a means of improving air quality, but it seems to be yet another step towards making diesel vehicles untenable for drivers, it adds, and will inevitably hit the diesel side of the auto manufacturing industry.

“The sale of new diesel vehicles is already in free fall,” it comments. “Car sales in the UK contracted by 12.2% in October compared to same period in 2016. Diesels have seen a 29.9% decline over the same period.”

Sin taxes

Tax increases on alcohol, tobacco and other sources of mass enjoyment were for a long time an easy target for revenue-hungry Chancellors. The price of tobacco is already so high that further significant increases are unlikely.

The full retail price of a pack of five of a certain brand of small cigar in Switzerland, for instance, is CHF4.60. At current exchange rates that is less than £4.

The price in a leading UK supermarket a few days for the same product was £12.55. The difference is accounted for entirely by UK taxation.

Alcohol looks vulnerable, however. A drinkable bottle of a Lindeman's red wine can be bought for £5, much the same level as 30 years ago. This is because excise duty has been below inflation for a number of years or even frozen in some.

The decision by the Scottish government to set a minimum price for a unit of alcohol establishes a clear precedent. If followed through, it could quadruple the cost of a can of beer from an off-licence.

Following a similar path could kill two birds with one stone. One, it would raise revenue. Two, it would be greeted with resounding applause from the many killjoys who belong firmly to the Puritan tradition of human behaviour.

Gambling, too, looks to be an easy target. There is great enthusiasm among the bien pensants in the UK for a crackdown on fixed odds betting terminals in high street betting shops (which are surely the most dismal retail experience on offer).

Reducing the maximum prize from £100 to £2 would reduce their allure as the 'crack cocaine of gambling'. But why reduce the allure if raising tax on it can increase revenue? William Hill and other betting companies could clearly be hit.

In conclusion

The UK's public finances are a mess. The national debt now stands at around 89% of gross domestic product (GDP). This compares with the 36.5% recorded in the 2009 budget statement.

Despite record low rates, debt interest alone is expected to cost £46bn in the current fiscal year compared with £28bn in 2009-10. This cannot continue. Spending must be cut or taxes must rise. Or debt must rise still further.

Or spending must be cut and taxes and debt must rise. The Chancellor and his government colleagues will recoil from any significant cuts.

If for short-term political reasons there is little or no room for significant maneouvre on raising taxes (other than possibly VAT) then we can reach only one conclusion.

Debt must rise.