This is Philip Hammond’s first budget statement since the general election in June and the third since he became chancellor last year.
In March he was cheered by his backbenchers after the UK avoided the recession predicted by many analysts following the Brexit vote last year. Employment was climbing and measures of consumer and business confidence, which plummeted after the referendum, had bounced back.
But he was soon in deep trouble with his Tory colleagues for planning a one percentage point increase in national insurance on the self-employed and, in a humiliating U-turn, he was forced to ditch the whole idea.
The election in June left Hammond further weakened. He needs to push through measures that improve the economy’s productivity to have any chance of meeting his pledge to eliminate the UK’s deficit by the mid-2020s, but is also facing pressing problems in public services, welfare provision and a housing market that has effectively locked a generation of young people out of home ownership.
Economy
What we know: The UK economy expanded by 1.7% in 2016 but registered just 0.5% growth in the first half of this year. The pace has improved since the summer largely due to improving growth rates in Europe and the US, but the outlook remains weak.
What to look out for: The Office for Budget Responsibility (OBR) is expected to downgrade the 2% GDP growth it was expecting for 2017 back in March to about 1.5%. Growth expectations for the next four years are also likely to be lowered. There is a productivity crisis that the OBR has been understating and is about to include more realistic forecasts. That will trigger a reduction in the forecast for tax receipts, knocking the chancellor’s deficit reduction plan off course.
Public spending
What we know: In March the OBR expected the public finances to plunge further into the red this year and the budget deficit to worsen for the first time in seven years, but tax receipts have held up well and the deficit is on course to be at least £6bn smaller than forecast in March.
What to look out for: Usually chancellors use an election victory to raise taxes and Hammond is unlikely to be an exception. But he will need to use stealth taxes and avoidance crackdowns to raise funds if he is to sidestep his cabinet critics.
Public services
What we know: The government’s 1% cap on public sector pay rises will be relaxed in the police and prison services. Prison workers are getting a 1.7% pay rise and police officers will get an additional 1% bonus.
What to look out for: he head of the NHS, school heads and others want to relax the pay cap and spending more generally. It looks like Hammond will take a hard line, though he could promise to increase pay above 1% later in the parliament.
Universal credit/welfare
What we know: About 7% of tax credit claimants have moved to universal credit and, according to Labour MPs and food bank charities, the system is chaotic and causing extreme hardship. Lower payments for disabled people, who were already hit hard by the bedroom tax, are also a cause for concern among anti-poverty groups. A rise in inflation has also hit as many as 11m families who claim benefits and are at the beginning of a four-year income freeze.
What to look out for: Hammond is expected to announce some easing of the rules for universal credit, possibly cutting the wait for the first payment from six weeks to four weeks. But he is not expected to offer more money to boost welfare payments.
Housebuilding
What we know: the private sector and housing associations built 220,000 new homes last year – up from 150,000 in 2015. Hammond wants to raise this figure to nearer 300,000, but says no single measure can achieve that aim. The communities secretary, Sajid Javid, wants local authority borrowing limits to be raised so local councils can get building.
What to look out for: housing will play a big role in the budget. A raft of announcements is likely. A stamp duty cut to help first time buyers get on the property ladder will be criticised for being a gift to property developers. Hammond could also back a £7bn transport linkin the “brain belt” spanning Oxford, Cambridge and Milton Keynes that the national infrastructure commission said could create 1m new homes.
Technology investment
What we know: Hammond has already said he plans to provide £1bn of new spending for hi-tech projects, including £75m for research on artificial intelligence, £400m for electric car charging points and £100m to boost clean car sales.
What to look out for: There will be talk of driverless cars being the future and Britain as a hub for technological developments. Any extra cash would be a surprise.
Brexit
What we know: Many Tory MPs have demanded Hammond set aside extra money to prepare for a no-deal Brexit. David Jones, a former Brexit minister, said at least £1bn should be allocated to recruit customs officers and border officials and develop IT systems. Until now Hammond has resisted all calls for setting aside money for leaving the European Union without a deal.
What to look out for: Brexit is the elephant walking the Treasury’s oak-panelled corridors. Its impact is so colossal that most of the forecasts for the next five years will almost certainly be wrong: either because they will be much better or worse than the central outlook. Expect Hammond to ignore pleas for a hard Brexit plan.
Pensions
What we know: The former chancellor George Osborne pushed through a radical overhaul of private pensions, cutting the lifetime limit on pension savings of £1.25m to £1m from April 2016. Hammond would like to axe the triple lock – of increasing the state pension in line with highest percentage increase from average earnings, inflation or 2.5% – but was forced to retreat from that plan.
What to look out for: there are unlikely to be changes to the state pension system. There is a chance Hammond might reduce the tax-free lump sum offered to private pension savers to 20% from 25%, which would bring the Treasury billions of pounds over the next 30 years.
Personal tax
What we know: Hammond is pledged to raise the personal income tax threshold to £12,500 by 2020, while the 40% higher tax rate is due to increase to £50,000. The 45p tax on incomes above £150,000 is expected to remain in place.
What to look out for: Hammond may choose to freeze all tax thresholds from 2020-21, giving himself a £3.5bn present in the penultimate year of the parliament and £5bn in the final year.
Transport
What we know: Last month the Scottish government was given £3.6bn over five years from 2019/20 – an increase of £600m on the previous period – to upgrade its railways. HS2 is already under way, with much of the land already purchased.
What to look out for: Hammond could flesh out details of a planned trans-Pennine railway and a “transforming cities fund” that involves £1.7bn of extra transport funding. The Tory mayor of the West Midlands region, Andy Street, will get £250m of the fund. The government aims to push total public and private expenditure in the sector to a£80bn over the next 10 years.
Fuel duty
What we know: Fuel-duty freezes for the past seven years have prevented tax rises of 18p per litre to pump prices. The exchequer would have been £20bn better off this year if the duty rises had gone ahead.
What to look out for: Another freeze is almost certain as Tory backbenchers prevent the Treasury from imposing further costs on hard-pressed workers, but the chancellor could shift the balance, raising duty on diesel and cutting it on petrol.
Tax avoidance
What we know: Hammond is under pressure from Labour to tackle aggressive tax avoidance, following publication of the Paradise Papers earlier this month. They raised questions about the tax affairs of corporations and individuals, from Apple to Formula One star Lewis Hamilton.
What to look out for: Hammond is keen to extend a crackdown on single person companies operating in the public sector to the private sector too. He suspects many only work for one employer for long periods and should therefore be employees.
Business rates
What we know: They bring in big money: £28bn last year, according to the OBR. A review that rebalanced higher payments to places with higher rentable values, primarily in London and the south-east, already has transition arrangements in place.
What to look out for: The rebalancing is causing pain in Tory heartlands. Hammond could delay changes, but the exchequer would lose out if he didn’t also axe business rate cuts due for the north and west.
Sin taxes
What we know: A sugar tax starts next April on sugar-sweetened drinks. The Scotch Whisky Association has lobbied intensively for a 3.9% duty rise imposed in March to be reversed.
What to look out for: The sugar tax will go ahead while duty increases on whisky, beer and cider will likely stay as they are or rise only gently. Wine drinkers and smokers will probably be punished again. Tax on wine in the UK has gone up by 57% since 2008.
Insurance premiums
What we know: Insurance premium tax – payable on general insurance policies such as home and car cover – has jumped from 6% to 12% in less than 18 months, costing every household about £200.
What to expect: Another hike is probably unlikely, but another move towards the 20% VAT rate could be a Treasury target.
source: The Guardian
