Spend now, tax later

In many ways, yesterday’s budget could be summarised as spend now, tax later.


Perhaps a rather benign sidestep from tradition, Chancellor Philip Hammond’s autumn budget is the first to be announced on a Monday since that of Selwyn Lloyd on April 9th, 1962. Back then it was accepted Lloyd would deliver an unpopular budget, but this time around, with Brexit on the cards, unpopular measures have largely been deferred.

The UK economy is still expected to experience sluggish economic growth over the next few years. Indeed, 2019 has been revised up from 1.3 per cent back in March to 1.6 per cent and forecasts up until 2023 fail to accelerate above this level. From a historical perspective this represents a pedestrian rate of growth, and Northern Ireland is likely to struggle to see growth above 1.0 per cent over this same period. This economic context is also predicated on a deal with the EU, requiring new emergency tax and spending measures in the eventuality of a no-deal Brexit.

Recent revisions to borrowing have improved the public finances, gifting the Chancellor a windfall in his latest budget announcement. On the spending front four keys area which are going to experience significant additional funding are the NHS, Universal Credit, the Ministry of Defence and the UK’s road network.

Northern Ireland is set to benefit by over £320m over the next two years from April 2019. Meanwhile, the Belfast City Region Deal is set to receive up to £350m, around £100m below what had been hoped for. In addition, negotiations are expected to open for a Derry/Londonderry and Strabane City Region Deal. These are encouraging developments, though hindered by the lack of a functioning Executive. The on-going decision paralysis is arguably more of a concern than funds. Delivery is crucial.

The UK high street received a package of measures to facilitate retailers, such as cutting business rates by one third for two years from April 2019. This doesn’t apply to Northern Ireland, however Belfast city centre retailers are set to benefit from a £2m cash injection in the aftermath of the fire at the Bank Buildings.

Competition from tech giants has adversely affected many high street retailers. The Exchequer has been impacted negatively too by the growth these companies and the lack of tax revenue stemming from them. This has led to the planned introduction of a new Digital Services Tax – a 2 per cent tax on the revenues they earn from UK users.

UK investment has been lacklustre and uncertainty surrounding Brexit has exacerbated this. Businesses will welcome the five-fold increase in the Annual Investment Allowance from £200,000 to £1m for two years from January 1st, 2019.

The Chancellor talked of ending austerity and highlighted this was not hinged on raising the tax bills of working families. A number of measures were announced to help people keep more of the money they earn, including an almost 5 percent rise in the National Living Wage from next year (though many businesses in Northern Ireland, for example those in the hospitality industry, will find this challenging). Philip Hammond announced a tax cut in the shape of raising the Personal Income Tax threshold to £12,500 and the higher rate (40 per cent tax) to £50,000.

Once again, the Chancellor also attempted to sell the benefits of a freeze on fuel duty for the ninth consecutive year. It’s worth noting that petrol and diesel prices have increased by 10 per cent and 11 per cent respectively since the last March budget. Higher prices are yielding increased revenues for the Exchequer. Therefore, negating the need to increase fuel duty.

The last Monday budget in 1962, as alluded earlier, was unpopular. Attention focused on the increase tax on confectionery items such as sweets, soft drinks and ice cream, a measure dubbed by many as a tax on children’s pocket money at a time when the Chancellor himself was only six years old.

Conversely, Philip Hammond has steered clear of unpopular measures. Arguably, his most popular message was “austerity is coming to an end.”

But what does this mean?

Just like “Brexit means Brexit”, this is wide open to interpretation. It is noted that public spending is set to rise again in real terms by 1.2 per cent per annum on average in the next few years. However, if you strip out the gains for health and defence other areas of public spending tell a different story.

It is difficult to see how we are going to reach the end austerity from a public spending perspective without entering a new era of higher taxation. Given the looming Brexit negotiations such unavoidable taxation measures have been withheld for another day. In the case of a no-deal Brexit, this day may come around sooner than expected.

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