What to expect from the Budget
The Budget is now in a state of flux.
With the changeover of the guard from Javid to Sunak; and the amalgamation of power under the roof of No. 10 following the defenestration of the No. 11 power base, there is uncertainty as to what direction the first Budget of this Government will take.
Recent reports indicate a step back from the previously rumoured mansion tax and revaluation of properties to capture more Council revenue, both of which are touchstone issues for much of Tory Britain. Rumours are however persisting of a recalculation of pension tax contributions – lowering the top rate from 40% to 20% under the guise of the ‘levelling up’ agenda. This is a quick win which has groundswell support across the Commons. The current unfairness of the policy on the less wealthy and ability to quickly raise upwards of £10bn are strong contributing factors and there is an inert understanding – no matter how reluctantly admitted to – that the system needs reform.
We will see if these policies make it into the Budget; however, it is certainly the case that both are on the Treasury’s list of revenue-raisers and are likely considered every year when the Chancellor needs to raise funds. The fact that they are being looked at is itself not surprising – what is noteworthy is that things have got so far that the Sunday papers are splashing on it – inevitably some way before any decisions have been made.
Lansons Director, James Dowling, recently wrote in The Telegraph that the Bank of England’s downgrading of UK GDP growth projections for the next three years will result in much greater focus on how spending increases can be financed. Until now, Ministers have shown scant interest in balancing the books – lip service has been paid to fiscal probity, before vastly increased spending is suddenly committed to. And the Government will almost certainly need to spend serious money if it is to meet its twin aims of delivering Brexit (successfully) and winning in 2024.
There is also a question mark hanging over the future of the Office for Budget Responsibility (OBR). No. 10 are looking to open the purse string and end austerity – an independent body continually acting as a check on their aspirations is not welcome or helpful in this climate of Global Britain and unerring positivity emanating out of the Cabinet. As its long standing Chair (Robert Chote) steps down next month, a reconfiguration or heavily influenced political appointee could be parachuted in.
Brexit is inevitably going to hit some sectors of the economy hard, even if others are able to do well out of it.
The Government needs to be able to mitigate these and smooth the country’s path to its post-Brexit future. Equally, levelling up the north will not be cheap. There is the infrastructure, skills and tech investment required to increase productive output; little of this is likely to bear much fruit before the 2024 election, so short term, the government will presumably offer tax cuts to increase incomes. In addition to these areas, billions have already been committed to the NHS (rising to £148bn by 2024). Prisons have been promised another 10,000 places (£2.5bn) – and the police another 20,000 officers (£500m in year one).
To this end, the Budget (and Autumn Spending Review) had been widely briefed to be a fiscally expansionary affair with money likely for R&D, the regions and, presumably, to offset any Brexit headwinds. However, if UK growth is taking a turn for the worse, then there is a real question about how, with so much spending already committed, the sums add up.
The Bank of England put the chance that the UK might already be in recession at 38%. This is itself quite significant – but things do not need to be this bad. In a world where the outlook looks less promising than when Philip Hammond was Chancellor – but spending is suddenly much higher – the rigours of the Budget process will inevitably confront ministers with the trade-offs that arise from committing a lot of public money without reference to the way in which it is financed. If growth is worse than expected, then more money needs to be found.
In this situation, HM Treasury will have to look at both revenue raising through tax, and spending cuts.
With a large majority, the Government has a relatively free hand. The risk is that areas of spending that are not a central political priority come under much greater pressure (even if they are otherwise sensible) and that taxes are increased simply with a view to bringing more money in the door – with less regard paid to the wider merits of the changes that are made.
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