With an unclear economic backdrop and mounting Brexit uncertainty, the Chancellor is expected to deliver a ‘prudent Budget’ that is reliant on low cost policy measures, according to the EY ITEM Club Budget Preview report.
Despite the Prime Minister’s pledge that austerity is over earlier this month, as well as better than expected public finances, the EY ITEM Club says that the Chancellor has limited scope for significant Budget giveaways unless he relaxes his fiscal rules. According to the EY ITEM Club, the Chancellor is more likely to hold off on major spending commitments (apart from the measures already announced on the NHS) until the 2019 Public Spending Review, once Brexit has occurred.
2017, a better year than expected …
- GDP growth in 2017 was 1.8%, a better performance than had been expected at the start of the year given Brexit uncertainties and the substantially increased squeeze on consumer purchasing power.
- GDP growth was limited to 0.3% quarter over quarter (q/q) in Q1 and Q2 2017, improving gradually to 0.4% q/q in Q3 and 0.5% q/q in Q4.
- However, this was the weakest expansion since 2012 and was lower than global growth and the stronger expansion in both the Eurozone and US.
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- On the positive side for the Chancellor, the Office for Budget Responsibility (OBR) will likely be making downward revisions to the expected budget deficit (before any policy changes) particularly for the current fiscal year (2018/19) but also on a five-year horizon which will reduce – but not remove – the need for tax increases to fund the extra NHS spending and any other additional spending commitments.
- The Chancellor has indicated that there will be a need for tax increases to pay for the extra NHS spending. Any other spending increases that the Chancellor announces will also need to be funded, if fiscal slippage is to be avoided.
- In looking to raise funds, the Chancellor may well consider reducing pension tax relief. Further targets could include online firms and cracking down on tax evasion by targeting bogus self-employment in the private sector. He could also introduce a digital services tax on large companies.
- The Chancellor could delay raising the tax-free personal allowance from £11,500 from the start of this parliament to £12,500 by 2020, and the threshold for the 40% rate of income tax from £45,000 to £50,000. Alternatively, the Chancellor could announce he will meet the commitment to raise the thresholds by 2020 and then pre-announce a freeze until 2022.
- Another possibility would be to scrap the planned cutting of the corporation tax rate from 19% to 17% that is currently scheduled for 1 April 2020. However, the Chancellor may be reluctant to go down that route as the Government is keen to send out a message that the UK will be business friendly post-Brexit.
- The Chancellor may want to encourage business investment, given that it has been pressured by heightened Brexit uncertainties and has a crucial role to play in trying to lift UK productivity. The British Chambers of Commerce (BCC) has called for the Chancellor to increase the annual investment from £200,000 to £1 million.
- In its latest forecasts for the UK economy, produced for the Spring Statement in March 2018, the OBR forecast GDP growth at 1.5% in 2018, before moderating to 1.3% in both 2019 and 2020. Based on these forecasts, the OBR projected that Public Sector Net Borrowing excluding public sector banks (PSNBex) would fall from a then estimated £45.2bn in 2017/8 to £37.1bn in 2018/19, £33.9bn in 2019/20 and £28.7bn in 2020/21.
- The EY ITEM Club forecasts that PSNBex for 2018/19 will come in £8.0bn ahead of the OBR’s forecast at around £29.0bn. This better than expected performance is primarily due to stronger income tax, national insurance contributions and capital gains tax receipts.
Businesses are looking for a coherent, integrated vision for how policy will be developed to shape the economy post-Brexit, with a focus on critical areas such as healthcare, climate change and trade. As far as possible the aim should be to encourage public and private sector collaboration, increasing the available resources and helping de-risk business decisions - critical at a time of high uncertainty."