Philip Hammond has delivered his first budget as Britain’s chancellor of the exchequer. Here panellists from The Conversation give their take on what it means for the UK economy.
Michael Kitson, University Senior Lecturer in International Macroeconomics, Cambridge Judge Business School
The chancellor delivered an upbeat assessment of the economy – upbeat but rose-tinted. The economy is currently being sustained by debt-driven consumption and a low exchange rate, and Hammond has done little to address the long-term challenges.
We were given another glimpse of the chancellor’s actuarial tendencies as he repeated the favoured mantra of his predecessor that he will “not saddle our children with ever-increasing debts”. However, what the country needs is an entrepreneurial chancellor who will invest to ensure our children inherit a prosperous economy.
On the plus side, Hammond has announced some modest investment in technical and vocational training with the introduction of T levels, combined with a hotchpotch of piecemeal initiatives to conceal the lack of a strategy. But there are important areas that were largely ignored. First, how is the economy going to develop robust trade links outside of the single market? Things may look rosy at the moment because of low exchange rate, but this is not sustainable.
Second, the British economy’s long-term record on investment has been poor and is likely to deteriorate if overseas companies decide that the UK is a less attractive option outside the EU. Offering subsidies and other sweeteners is not a coherent industrial policy. Innovation is one of the key mainsprings for long-term growth, but this requires companies to invest in the UK and for the economy to be open to talent from all countries.
The rhetoric was strong and the jokes were feeble. What was required – and what was lacking – was a long-term plan on how to deal with the challenges ahead.
Simon Wren-Lewis, Professor of Economic Policy at the Blavatnik School of Government, Oxford University
What any macroeconomist should ask of this budget is: has the chancellor done enough to get UK interest rates off near-zero (known as the zero lower bound); to get us out of what economists call a liquidity trap? When interest rates have gone as low as the Bank of England feels able to take them, then it has lost control of the economy. That is the situation right now.
The only duty of the chancellor in that situation is to give the Bank of England back control through a fiscal stimulus – something he has not done. If he did do this, however, the short-term deficit and borrowing numbers that go with the stimulus would be completely irrelevant. Seeing as he hasn’t done this, his budget has failed.
The performance of the economy since 2010 has been terrible. There has been no recovery, using the proper meaning of the word, from the Great Recession. All this time the Bank of England has been forced to keep interest rates at or near their floor, and use incredibly inefficient instruments like quantitative easing, because the government has kept on cutting spending. This is not normal and austerity is no longer even the international consensus.
Kevin Farnsworth, Reader in International Social Policy, University of York
The biggest surprise of this budget is that the most significant factor that affected it wasn’t mentioned at all. Not only did the chancellor not mention Brexit, it is not immediately obvious how any of his announcements connect directly to it either.
I would have expected a boost to regional development or support for new businesses along the lines being called for by the car industry. Usually, an unexpected boost to the finances – borrowing is set to be £26 billion lower than previously predicted by the end of this parliament as a result of stronger than expected growth – would provide some scope for new policies. But it gave the chancellor little wriggle room today. This is in part because he wants to reduce borrowing in future. But it is probably more to do with the fact that he wants to give himself more flexibility as the government prepares for Brexit.
Help is provided for larger businesses – perhaps those most able to leave the UK if they don’t get a good Brexit deal – by way of the further reduction in corporation tax (down to 17% by 2020). In ordinary times, this would be headline-grabbing – the UK already has one of the lowest rates of its competitors. But larger businesses may be disappointed that Hammond didn’t go further. His predecessor, George Osborne, promised to bring corporation tax down to 15% in his budget following the Brexit vote.
So it’s surprising that Brexit didn’t really feature. We might have expected much more in the way of help, support and compensation for businesses considering their own futures once article 50 is triggered. My guess is that the chancellor is playing a waiting game, with one eye on the potential for greater borrowing to ease Brexit going forward. And such is the level of uncertainty in the future that what he did today amounts to the calm before the storm.
Geraint Johnes, Professor of Economics, Lancaster University
Productivity is very much at the heart of the budget, with specific projects being allocated funding from the £23 billion fund previously announced in the 2016 Autumn Statement. These include investment in STEM research, support for disruptive technologies, help with the high-speed broadband roll out and further transport projects to relieve local congestion.
But the main announcements made today concern the country’s education and skills infrastructure. New funding will be made available to support the creation of 110 free schools. These will, controversially, include new selective schools and specialist maths schools. While it is widely recognised that students attending selective schools can benefit from the experience, average performance across all students in areas served by such schools is not enhanced.
The chancellor also announced a long overdue and welcome tidying up of vocational and technical qualifications, replacing more than 13,000 qualifications by some 15 new T levels. Here the devil will be in the detail – we know that the job market has been polarising and that routine jobs will face challenge from continued advances in automation. To prevent a situation where we train people to do jobs that robots will soon do, technical education will need to emphasise adaptability, a high level of creativity, and the ability to learn how to learn. Finally, a relatively small investment – but an important one – addresses the issue of lifelong learning. Hammond has announced £40m to be spent on pilot projects in this area.
Ian Greenwood, Associate Professor in Industrial Relations and Human Resource Management, University of Leeds
The government’s plan for a “modern industrial strategy” requires clarity of vision, strong leadership and of course substantial investment. In his budget speech today, Hammond offered additional investment in intermediate skills, but – worryingly for UK industry – the extent that the government is ideologically committed to management of the economy is unclear.
Hammond adopted a schizophrenic attitude to state intervention – a corollary of any industry strategy. He attacked the Labour Party for its past intervention in the economy while seeming to accept that the market does not always work as a remedy to all ills.
The immediate and critical needs of the UK aerospace and automotive sectors, and the downstream foundation industries – such as steel – that support these sectors are manifest. They will drive innovation, R&D and good jobs, especially in the context of Brexit. It would not have been difficult to develop a narrative in today’s announcement that the government understands this.
Is it significant that this was absent? The acquisition of Vauxhall by France’s PSA Group has raised again the prospect of the auto industry exiting the UK. The upstream devastation that this would cause to the wider economy surely warranted a mention?
Pensions and savings
Jonquil Lowe, Senior Lecturer in Economics and Personal Finance, The Open University
The budget confirmed that reform of national insurance for the self-employed will go ahead from 2018. Class 4 national insurance contributions will be increased in stages over two years, taking the standard rate to 11% from its current level of 9% (compared with the 12% paid by employees). The original rationale for the lower rate for the self-employed was mainly that they were not entitled to the old additional state pension. With the introduction of the flat-rate state pension since April 2016, the self-employed now build up the state pension at the same rate as employees. The remaining 1% point gap compared with employees reflects the self-employed’s lack of sick pay and contributory unemployment benefits, although the government has said it will consult on parental benefits for the self-employed.
There will also be measures to reduce the tax advantage for working through an owner-managed company, starting with a reduction in the Dividend Tax Allowance (only introduced in April 2016) from £5,000 to £2,000 from April 2018. This will also affect investors with large shareholdings (around £50,000 or more).
A new National Savings & Investments 3-year bond will be introduced from April. Offering 2.2% a year (taxable); it is among the best rates currently available. But, with inflation forecast to rise to 2.4% this year, competing returns may prove better.
Michael Devereux, Professor of Business Taxation, University of Oxford
The “dividend tax exemption” of £5,000 was introduced only in the summer budget of 2015 and came into effect in April 2016. Now it has been reduced by to £2,000. It is hard to see much consistency there.
It seems that Hammond is concerned about the tax incentives for individuals and partnerships to incorporate – when they would be liable to corporation tax and income taxes on dividends – instead of income tax on the whole income.
The corporation tax rate is falling to 19% in 2017/8, which is much lower than income tax rates. Plus there is no national insurance on corporate profit. Taxes on dividends do generally remove the tax advantage to incorporation – and more so now. But that is only when profits are distributed; if you keep the profit in the company then you pay only corporation tax.
So why was the dividend tax exemption ever introduced? And why not just get rid of it entirely? Maybe that is for next year.
This is an edited article which first appeared on The Conversation.