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2017MARCH

Spring Budget 2017A Cicero Group analysis

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Foreword

When Philip Hammond spoke of the Brexit rollercoaster at Conservative Conference in October, he probably didn’t anticipate that the economic outlook would be so benign for his Spring Budget. Growth is higher than expected, employment is robust, borrowing is lower. Project Fear it ain’t.

While this gives Hammond a bit of space, he has been careful not to allow the positive message to slide into hubris. For a start, he is all too aware that OBR forecasts are highly sensitive to growth projections and growth forecasts are notoriously fickle. If UK consumers stop borrowing to fund consumption as they have been, or the housing market stutters, then the fiscal situation could deteriorate quite quickly leaving him in a difficult spot in the autumn.

Brexit looms over all, but was barely mentioned either in the statement or the Red Book. That’s because this was a Budget that focussed primarily on domestic challenges. The most important of these is addressing the funding crisis in social care. Hammond has managed to find some money to help provide relief to hard-pressed local authorities, but a long-term solution must be found. Regardless of the solution the Government chooses, this is possibly the most important long-term social policy discussion since the Turner Commission reforms to the pension system. The Government will publish a Green Paper on funding later this year, but in an emphatic and pointed pledge, the death tax will not be an option up for consideration.

This budget was so Philip Hammond

George Osborne’s love of the ‘big reveal’ was the cause of a lot of heartburn both inside Government and outside. Conversely, Philip Hammond has taken much of the drama out of fiscal events, though he has an unexpected knack for delivering a good joke. Those who have seen him speak often will recognise the wry sense of humour increasingly finding its expression at the despatch box. He delivered some zingers today, mostly at the expense of Labour. It’s clear he’s enjoying himself.

Though deficit reduction remains the sine qua non of fiscal policy, there is also the emergence of a distinct ‘Hammond-ian’ approach in which difficult reforms will be made if they tackle unfairness in the system. Take also the bold statement that the Government would

not shrink from raising taxes if needed – and that these changes would be clearly spelt out.For example, a long section of Hammond’s statement carefully addressed the imbalance in taxation between self-employed and employed people. Seemingly breaking a Conservative manifesto commitment – and ditching reforms proposed by George Osborne – he has tweaked national insurance rates so that the self-employed will pay more from April 2018. This will face stiff opposition in some quarters, and it’s almost inconceivable that Osborne would have chosen a similar route; his visible wince at the announcement was telling. Hammond is also reducing the tax-free allowance on dividends to try to close a similar gap in taxation for owner-directors and company employees. This is probably the first step in a longer-term equalisation of tax treatment so that individuals cannot use their employment status to arbitrage the tax system. It will make the system fairer, but it was certainly not the path of least resistance.

The Spring Budget has got an exciting cover and a snazzy name

Budget Statement 2017 - Headline economic figures

UK projected growth rates

2017

2018

2019

2020

2021

2% - up from 1.4%

1.6% - down from 1.7%

1.7% - down from 2.1%

1.9% - down from 2.1%

2% - no change

Current account deficit

2017

2018

2019

2020

2021

3.2%

3.5%

2.6%

2.2%

2.0%

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Inflation

2017

2018

2019

2.4%

2.3%

2.0%

As a result, the OBR expects the pace of consumer spending to slow. It also forecasts private investment to remain subdued.

Productivity

If the Chancellor is enthusiastic about one thing, it’s productivity and particularly the role of technology in boosting it. He has long said that UK workers are less productive than those in France, Germany and Italy. The UK’s competitiveness is derived from the fact that the British simply work longer hours to produce the same amount.

This is not a new problem, but Hammond is unusual in the fact that he has made it a signature priority. The two pillars of Hammond’s productivity offensive are training and infrastructure.

There is a package of measures today to try to address this including the introduction of new T-Levels, £270m of funding for cutting-edge R&D and 1,000 new PhD places and fellowships in STEM subjects. There is also some cash for 5G, fibre roll-out and the alleviation of road congestion. The future

A low-key Spring Statement to update on the public finances and an Autumn Budget is the new fiscal rhythm to which Whitehall will march. Hammond has again showed he has no intention of making policy on behalf of other members of the Cabinet.

In any case, the Chancellor has a number of long-term challenges to deal with, of which Brexit is only one. Brexit is important, but for most people making sure their loved ones are looked after in the later years – or seen by a doctor when they are ill – is a more immediate and visceral issue. All politics is local, and once the public’s attention has moved on from Brexit (as it will) attention will come back to what they see every day: public services.

John RowlandExecutive Director

Chairman’s view - click here

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Budget Statement 2017 - Headline economic figures & sector by sector

Borrowing and debt

Although borrowing is lower than forecast this year and next, Britain still has a debt of nearly £1.7 trillion. Debt is forecast to be 86.8% this year, peaking at 88.8% of GDP in 2017-18 (1.4% lower than forecast). Public sector net borrowing forecasts:

• 2016/17: £51.7bn (down from £68.2bn previously forecast)

• 2017/18: £58.3bn (down from £59bn)• 2018/19: £40.8bn (down from £46.5bn)• 2019/20: £21.4bn (down from £21.9bn)• 2020/21: £20.6bn (down from £20.7bn)• 2021/22: £16.8bn (down from £17.2bn)

Banking

• There were no new announcements of direct relevance to the banking sector in this year’s Budget and no references of the financial services sector in the document itself.

• With regards to the sale of state-owned banks, the Budget recommits to the sale of Lloyds, which is on track to recover of the £20.3 billion injected into the bank, as well as a commitment to continue to seek opportunities for disposals of shares in RBS.

Pensions and Savings

• The National Savings and Investment Bond announced at the Autumn Statement is confirmed at a rate of 2.2% over a term of three years, available for 12 months from April 2017.

• Confirmation of the rise in the ISA allowance to £20,000 from this April.

• The Government will amend the tax registration process for master trust pension schemes to align with the Pensions Regulator’s new authorisation and supervision regime.

Insurance • Following the changes to the discount rate,

announced at the end of February, there were no new announcements directly pertaining to the insurance sector in this year’s Budget.

• The previously announced 2% increase of Insurance Premium Tax, which will take affect from June this year, is going ahead with the revenues for this increase reflected in the overall tax receipts for the rest of the Parliament.

Asset Management

• Director’s shareholder tax-free dividend allowance is to be reduced from £5k to £2k from April 2017.

Business Taxation • The Government remains committed to the

business tax road map. As set out at Autumn Statement 2016, the Government will cut the rate of corporation tax to 19% from April this year (2017) and then to 17% in 2020.

• The Government will provide an extra year, until April 2019, before Making Tax Digital is mandated for unincorporated businesses and landlords with turnover below the VAT threshold.

• HMRC will work with businesses and interested parties to consult over the summer on its process for risk profiling large businesses and promoting stronger compliance.

• The Government will make administrative changes to the Research and Development Expenditure Credit to increase the certainty and simplicity around claims and will take action to improve awareness of R&D tax credits among SMEs.

• The Government will renew and extend the administrative simplifications of the Double Taxation Treaty Passport scheme to assist foreign lenders and UK borrowers.

• The Government will introduce an exemption from withholding tax for interest on debt traded

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on a Multilateral Trading Facility, removing a barrier to the development of UK debt markets. The Government will consult in spring 2017 on implementation of the exemption.

• The Government will delay the reduction in the filing and payment window on stamp duty land tax until 2018-19.

• The Government will publish a call for evidence on exemptions and valuation methodology for the income tax and employer NICs treatment of benefits in kind, in order to better understand whether their use in the tax system can be made fairer and more consistent.

• The Government will consult on the design aspects of the tax administration system, including interest and penalties, with the aim of adopting a consistent approach across taxes.

Tax Avoidance and Evasion

• The Government will introduce new legislation to ensure that promoters of tax avoidance schemes cannot circumvent the POTAS regime by re-organising their business by either sharing control of a promoting business, or putting a person or persons between themselves and the promoting business.

• As announced at Autumn Statement 2016, the Government will introduce a new penalty for a person who has enabled another person or business to use a tax avoidance arrangement that is later defeated by HMRC. The Government will also remove the defence of having relied on non-independent advice as taking ‘reasonable care’ when considering penalties for a person or business that uses such arrangements.

• The Government will remove the ability for businesses to convert capital losses into trading losses from 8 March 2017.

• The Government will introduce a 25% charge on transfers to qualifying recognised overseas pension schemes (QROPS).

• The Government will shortly publish a call for evidence on the case for a new VAT collection mechanism for online sales.

Business Rates

• The Chancellor confirmed that national business rates will not be abolished. The Government will set out its preferred approach in due course and will consult on it before the next revaluation is due in 2022.

• The Government will provide £435 million of further support for businesses facing significant increases in bills from the English business rates system.

• The Government will support small businesses losing Small Business Rate Relief by limiting increases in their bills to the greater of £600 or the real terms transitional relief cap for small businesses each year.

• The Government will provide English local authorities with funding to support £300 million of discretionary relief, to allow them to provide support to individual hard cases in their local area.

• The Government will also introduce a £1,000 business rate discount for public houses with a rateable value of up to £100,000, subject to state aid limits for businesses with multiple properties, for one year from 1 April 2017.

Business Support

• Market intervention – a green paper will be brought forward on protecting the interests on consumers – from unexpected fees and clauses; give consumer bodies greater enforcement powers.

• Reviewed R&D tax credit regime – accepted industry calls for a reduction in administrative burdens.

• Reduction in the revenue from the sugar tax, because producers are reducing the amount of sugar in drinks. Schools will get £1 billion from the revenue expected for this.

Budget Statement 2017 - Sector by sector

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• Vehicle excise duty frozen for hauliers, and HGV road user levy frozen, with no changes to previously planned duties on alcohol and tobacco.

• The Government will introduce a £1,000 business rate discount for public houses with a rateable value of up to £100,000, subject to state aid limits for businesses with multiple properties, for one year from 1 April 2017.

• The government will consult on proposals to redesign rent-a-room relief, to ensure it is better targeted to support longer-term lettings. This will align the relief more closely with its intended purpose, to increase supply of affordable long-term lodgings.

• £690 million to local authorities to get local transport networks moving.

• The new Industrial Strategy Challenge Fund (ISCF) will support collaborations between business and the UK’s science base. An initial investment of £270 million in 2017-18 will launch the development of disruptive technologies.

• Government will investigate the use of tax incentives to make it easier for operators to sell oil and gas fields, helping to keep them productive for longer. A panel of experts will be set up to examine the issue and a discussion paper on how to help the industry will also be published.

Infrastructure/Housing

• The Budget takes the next steps in delivering the Government’s Industrial Strategy by setting out the initial actions being supported by National Productivity Investment Fund (NPIF): a ‘5G Strategy’ creating a new National 5G Innovation Network to trial and demonstrate 5G applications; allocating £690 million to local authorities to get local transport networks moving; and investing £300 million to further develop the UK’s research talent, including through creating an additional 1,000 PhD places.

• The NPIF will invest £740 million in digital infrastructure by 2020-21, to support the next

generation of fast and reliable mobile and broadband communications for consumers and businesses.

• Starting in 2017, the Government will invest £200 million to fund a programme of local projects to test ways to accelerate market delivery of new full-fibre broadband networks.

Devolution • The application of the Barnett formula to spending

decisions taken by the UK Government at the Budget will provide each of the devolved administrations with additional funding to be allocated according to their own priorities:

• £350 million for the Scottish government • £200 million for the Welsh government • £120 million for the Northern Ireland Executive

• The Government will shortly be announcing the Midlands Engine Strategy, and is continuing to build the Northern Powerhouse.

• The Government has agreed a Memorandum of Understanding on further devolution to London, which includes joint working to explore the benefits of, and scope for, locally-delivered criminal justice services; action to tackle congestion; and a taskforce to explore piloting a new approach to funding infrastructure.

• The Government is working with local partners and the Scottish and Welsh Governments respectively to achieve city deals for Edinburgh and Swansea. The Government has also opened negotiations for a city deal for Stirling.

• There is £90 million for northern transport; £23 million for Midlands from fund on road network.

Personal Taxation and Welfare

• The personal allowance will rise to £11,500 next month while the higher rate threshold will increase to £45,000.

Budget Statement 2017 - Sector by sector

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• The welfare cap, which was reset at Autumn Statement 2016 and which is based on the OBR’s forecast at Autumn Statement 2016 of the benefits and tax credits within its scope, will apply to welfare spending in 2021-22.

• The Government will deliver welfare savings already identified but has no plans to introduce further welfare savings in this Parliament beyond those already announced.

Consumers

• The Government will shortly bring forward a green paper to examine markets that are not working efficiently or fairly.

Interim steps will be taken by:

Skills • The Budget’s focus on skills builds on over

£23 billion of additional high-value investment committed at Autumn Statement 2016, through the National Productivity Investment Fund (NPIF).

• £300 million to support the brightest research talent, including for 1,000 PhD students in STEM subjects.

• £200 million for projects to get private sector investment in full-fibre broadband networks.

• £270 million to keep the UK at the forefront of disruptive technologies like biotech, robotic systems and driverless cars.

• Funding for 110 new free schools, including new specialist mathematics schools, on top of the current commitment to 500. Forthcoming Schools White Paper will ask universities and private schools to sponsor new free schools.

• The Government will extend the free schools programme with investment of £320 million in this Parliament to help fund up to 140 schools, including independent-led, faith, selective, university-led and specialist maths schools.

• Lifelong learning pilots – The government will spend up to £40 million by 2018-19 to test different approaches to help people to retrain and upskill throughout their working lives.

• Return to work support – Government will work with business groups and public sector organisations to identify how best to increase the number of returnships, supported by £5 million of new funding. Returnships offer people who have taken lengthy career breaks a clear route back to employment.

Health and Social Care

• Government will publish a Green Paper on future funding arrangements for social care later this year – this will not include proposals for a so-called ‘death tax’ on estates to fund care.

• Additional grant funding of £2 billion will be made available for social care in England over the next three years, including £1 billion in 2017-18.

• The Health and Communities Secretaries will announce measures to deliver further support to local authorities which are struggling and pursue a more joined up approach with the NHS.

• The Government will provide an additional £100 million to the NHS in England in 2017-18 for capital investment in A&E departments.

• The government will invest an additional £325 million to allow the first NHS Sustainability and Transformation Plans to proceed.

Budget Statement 2017 - Sector by sector

• Legislating at the earliest opportunity to allow consumer enforcement bodies, such as the Competition and Markets Authority, to ask the courts to order civil fines against companies that break consumer law.

• Developing proposals to protect consumers from facing unexpected payments when a subscription is renewed or when a free trial ends.

• Considering how to make terms and conditions clearer, simpler and shorter for consumers to engage with.

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BUDGET 2017 73,086TWEETS

Social care Education

3,303 2,838

££

£

TOP ISSUES

NHS National Insurance Business rates

£MOST RETWEETED

Here it is. My first (and last) Spring Budget #Budget2017 https://t.co/BZCj8QK6PF

Philip Hammond @PhammondMP

412 Retweets 355 Likes

Here’s a snapshot of economic data announced by the Chancellor #Budget2017 https://t.co/m3Lq5e1VtQ

HM Treasury @hmtreasury

293 Retweets 57 Likes

From where I’m sitting 2% rise in NICs for self employed is breach of tory manifesto pledge not to raise direct personal taxes. #Budget2017

Norman Smith @BBCNormanS

194 Retweets 99 Likes

£

£

£

Tweets by MPs

3,623 2,091 1,919

9

£

Jason McCartney Andrea Jenkins Steve Rotheram Tom Blenkinsop Richard Harrington

£

TOTAL TWEETS BY MPS

MOST ACTIVE MPS

90 76 57 35 31

45%

3%

Conservatives

Others

44%

Labour

8%SNP

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