Budget 2018: An Election Footing Budget?

Prime Ministers and their Chancellors do not always see eye-to-eye. Just ask Gordon Brown and Tony Blair, or Nigel Lawson and Margaret Thatcher. Philip Hammond and Theresa May are no different. The Prime Minister’s announcement earlier this month at the Conservative conference that “austerity is over” was rumoured to have antagonised the Chancellor and his advisers no end.

If that was the case, the Chancellor showed no sign of his animosity today. Philip Hammond used his Budget statement to confidently affirm that the age of austerity was “coming to an end”, albeit clarifying that “discipline would remain”.

For a Chancellor not renowned for his political savviness, this was a very political Budget, which bore flashes of his predecessor, George Osborne, who would often use Budget day to draw political fault lines with the Labour Party. A cynical observer might be forgiven for thinking the Government was readying for a possible General Election campaign.

Buoyed by a short-term spending boost made possible by an unexpected windfall in the public finances, the Chancellor had plenty of Budget giveaways up his sleeve. Most notably was a commitment to bring forward the increase in the personal income tax allowance from 2020 to 2019, and an additional £400 million funding for Schools in England (presumably to avert a looming backbench rebellion) and £650 million grant funding for Local Councils to fund Social Care.

This was also an unashamedly pro-growth Budget from a Chancellor keen to reassert the Conservatives’ reputation with business, with proposals to increase the Annual Investment Allowance from £200,000 to £1million and a £675 million fund to rejuvenate the High Street.

There was plenty of red-meat for his Conservative colleagues too, with the announcement of an additional £1 billion to the defence budget – ostensibly to boost the nation’s cyber security capabilities and continuous at-sea nuclear deterrent – but which also allowed the Chancellor to land a political blow against the Labour leadership, which had fought their entire political lives to abolish.  With one fell swoop, the Chancellor also announced that he was abolishing the future use of all PFI contracts, banishing a “Labour legacy” to the history books.

A new slogan also entered the Brexit lexicon, with the Chancellor talking of a “Double Deal Dividend” released from uncertainty and an easing of fiscal constraints, with the promise of an additional £500 million for Brexit preparations. This was a noticeable shift in outlook from a Chancellor characterised by his detractors as “remoaner in chief.”

On a personal level, the Chancellor’s confidence was telling. With many suggesting this could be his last Budget as Chancellor, Hammond appeared remarkably confident and comfortable at the despatch box. The real test, however, for the Chancellor will be shaping and sustaining a positive post-Budget media narrative. With memories still fresh from his own screeching U-turn last year on proposals to hike National Insurance contributions for the self-employed, just seven days after his Budget, the Chancellor will lean heavily on his Media Chief, Giles Winn, and the impressive Steffan Ball, his Chief Economic Adviser, to land his messages.

If this is the last Budget for Hammond, it was not the “Halloween horror show” that many Tory backbenchers had feared from a famously tin-eared Chancellor.  Nevertheless, today’s Budget statement carries significant political risk for the Conservatives. By declaring that austerity is over, the Government risks blunting one of their key political arguments against the Labour party, allowing the opposition party to frame any future budget cuts as callous and ideologically driven, rather than born of economic prudence or necessity. With Brexit headwinds gaining strength, the IFS expressing concern about the Budget’s “sluggish growth” forecasts, and difficult spending decisions kicked into the long grass as part of next year’s comprehensive spending review, the Government may yet become politically unstuck.

Main Budget Announcements:

• Economic Outlook: UK GDP grew 1.7% in 2017. OBR expects growth of 1.3% in 2018,  1.6% in 2019 and 1.4% in 2020. Unemployment at 4% (lowest since 1975). Jobs figures revised up, 800,000 more jobs expected by 2023. Inflation is at 2.4% (CPI – Sept). Real wages are increasing.
• Fiscal Outlook: Deficit down to 1.4% of GDP and falling to 0.8% of GDP by 2023-24. National debt still 80% of GDP, expected to fall to 74.1% in 2023/24.
• Brexit Prep: An additional £500m has been allocated for Departmental Brexit Preparations in 2019-20.
• Minimum Wage: National Living Wage increased to £8.21 from April 2019. Low Pay Commissions remit to be expanded.
• Personal Taxation: Personal allowance to £12,500 from April 2019. Higher rate threshold raised to £50,000 in April 2019.
• NHS: The £20.5bn five-year headline funding commitment first made in June has been confirmed. New Mental Health Crisis Service. Extra £650m grant funding to Local Councils for Social Care.
• Defence: Additional £1bn to MOD to boost Cyber warfare, anti-submarine capability, and the Dreadnought programme.
• Counter Terror: Extra 160m to protect CT Policing in 2019/20.
• Education: £400m one-off Schools Bonus giving schools extra funding this year.
• Potholes: £420m for local highway authorities to repair potholes. £30bn to improve national roads infrastructure.
• Productivity: National Productivity Investment Fund (NPIF) increased from £31bn to 37bn. 1.6bn for advanced technologies, 150m for Scientific Fellowships
• PFI:  PFI and PS2 abolished for future contracts.
• Business Investment: Annual Investment Allowance increased from £200m to 1m for 2 years. UK Export Finance direct lending facility extended by £2bn.
• Border: E-gates at airports to be opened to non-EEA citizens.
• Apprenticeships: Apprenticeship training contribution for Small Businesses reduced from 10 to 5%.
• Entrepreneurs Relief: retained, but minimum qualifying period extended to 2 years.
• VAT: Threshold maintained for a further two years.
• Digital Services Tax: Narrowly targeted 2% tax on money made from UK users by established tech giants (search engines, social media platform and online marketplaces). Not a general online service tax, but paid by companies which are profitable, and subject to £500m global revenue requirement. To raise £400m a year from 2020. Hope that a global deal will replace this.
• High Streets: £675m for Future High Streets Plan to rejuvenate High Streets.
• Business Rates: For next two years, £51,000 rateable value or less, bills cut by one third. Annual saving of up to £8,000 for 90% of pubs restaurants and cafes.
• Public Lavatories: Mandatory rate relief for public lavatories.
• Housing: £5.5bn for the Housing Infrastructure Fund to support the building of 650,000 homes.
• Devolution: Transforming Cities Fund to £2.4bn to support a raft of regional development initiatives.
• Plastics: New Tax on manufacture and import of plastic packaging with less than 30% recycled plastics. Consultation on a plastic packaging tax for April 2022.
• Duties: Fuel Duty freeze maintained, Tobacco escalator maintained, Beer/Cider/Spirits all frozen. Air Passenger Duty to rise in line with inflation, but no change for short haul flights.
• Gaming: Online gaming duty replacing revenues from FOBT machines.
• Universal Credit: Additional £1bn over five years. UC Work Allowance increased by £1000 a year.

More information:

We are currently preparing a series of more in depth briefings on some of the key announcements of today’s Budget.

If you’d like more information, please don’t hesitate to get in touch.