EY ITEM Club
Pressure to loosen austerity intensifying
The Chancellor is in an unenviable position heading into the Budget. Pressure for bold action has been intensified by the Conservatives’ loss of their parliamentary majority in June’s general election.
Additionally, with slow-moving Brexit negotiations clouding the outlook, business organisations including the CBI, BCC and BRC are pushing for business-friendly measures to foster investment and boost productivity. There’s particular pressure for action to alleviate the hike in business rates scheduled for April 2018.
There are a few bright spots: public finances performed substantially better than expected over the first six months of fiscal year 2017/18, and the 2016/17 shortfall was markedly lower than projected in March’s Budget. But the Chancellor’s room for manoeuvre in the 22 November Budget is still severely constrained – not least by the Office for Budget Responsibility’s (OBR’s) announcement that it’s “significantly” revising down its expectation for UK productivity growth over the next five years, after the anticipated pick-up failed to materialise.
OBR set to cut its growth forecasts
The impact of the downward revision to productivity growth could be partly countered by the OBR cutting its view of the equilibrium unemployment rate and lifting its expectation of hours worked. Nevertheless, it’s likely the OBR will reduce its forecasts for UK GDP growth and increase its budget deficit projections. In March, the OBR indicated the Chancellor had a buffer of £26 billion if he was to hit his target of bringing the structural budget deficit below 2% of GDP in 2020/21. This looks likely to be reduced substantially. It’s also increasingly questionable whether a balanced budget can be achieved by the mid-2020’s.
Low-cost measures are likely
For his part, Mr Hammond appears reluctant to abandon his fiscal targets, and has indicated he will pursue a "measured and balanced" approach to reducing public borrowing. Given Brexit-related uncertainties facing the economy, the Chancellor is reportedly concerned that investor confidence in the UK could be seriously damaged if he abandons the fiscal framework adopted only a year ago.
Given all this, the Budget is likely to be relatively low-key and largely reliant on low-cost measures. The Chancellor may also look to support economic activity by relaxing regulations, such as house building restrictions. Mr Hammond has indicated his priorities will be lifting productivity, boosting the housing market, helping consumers and supporting high-growth firms short of finance.
Bold moves may be on the agenda?
If he has the appetite, the Chancellor could take some bold measures in the Budget while maintaining fiscal discipline. However, this would require rebalancing measures. For example, Mr Hammond is reportedly considering promoting “intergenerational fairness” through cutting National Insurance contributions for workers in their 20’s and 30’s, and financing it by slashing pension tax relief for older workers.
The Chancellor could also package up a number of low-cost business-friendly measures to foster business investment, such as help in accessing finance, incentives to undertake and pool R&D, and a pledge to get infrastructure investments already announced underway promptly. There could also be extra investment in digital connectivity.
Meanwhile, the Chancellor could look to help consumers by lifting the tax-free personal allowance from £11,500 and the threshold for the 40% income tax rate from £45,000. The government is committed to raising these to £12,500 and £50,000 respectively by 2020. It is also set to further ease the public sector pay cap, following above-1% increases already announced for the police and prison workers.