In case you hadn’t noticed today the UK Government released it’s latest Budget today, so it must be time for one of my Budget Blogs!
The main headline as you’ve probably noticed is the Conservatives doing what the Conservatives love doing – encouraging home ownership, this time by offering no stamp duty for first time buyers (for homes under £300,000). Or the fact that there were many Best Man-esque jokes in the Budget report.
The Budget was also almost as famous for what wasn’t in it as what was – the Leader of the Opposition, Jeremy Corbyn, attacking the Government for not helping those in social care, those who work in Public Service, and those sleeping rough.
So what’s the real deal? As always, we dive into the actual Budget Report itself (available here) and take a look.
A Boring Budget?
Before the Budget there was lots of speculation as to whether this was going to be a “boring budget”. To understand this you need to bear in mind the context of this Budget.
The Conservative Party does not have a majority in the House of Commons. It’s running the country with a supply deal with the Northern Irish DUP party. This makes it very easy for the Opposition parties to convince a few Government MPs to rebel and overturn any key policy. Since the Budget, like all other laws, needs to be voted in by the House of Commons, it means the Chancellor of the Exchequer, Philip Hammond, wouldn’t want to announce anything too contentious as it would increase the odds of the Budget in it’s entirety being overturned. And it wouldn’t have been the first tine he would have had to do an embarrassing U-turn on Budget policy – for it to happen again on only his second Budget would be disastrous – for him anyway.
And it’s not as if he’s got a lot of wriggle room. The UK Government spending still runs at a deficit every year – we spend more than we get in tax revenues – and the economy is not exactly stable with the backdrop of an ever-uncertain Brexit. With inflation at 3%, interest rates having just raised to 0.5% and UK productivity still stubbornly lower than elsewhere, it’s not as if Mr Hammond is in a position to suddenly spend lots of money. Unless he completely reversed Government policy to borrow now to invest in the country (something I personally believe he should do), but this would risk rebellion within a Government that only barely has a majority.
The economic outlook isn’t that good either: “over the medium term the impact of a weaker economic outlook and the measures taken at the Budget see borrowing higher than previously forecast.” says the Government’s own Budget report!
So many expected Mr Hammond to announce modest changes and some boost to home ownership.
Spend Spend Spend (calmly)
As you listened though, the list of spending commitments went up – the NHS, home ownership, changes to Universal Credit – but changes to taxes were relatively modest.
Dive into the report and you actually quickly reach an amazing conclusion. Without making too much of a deal or a dance over it, this is a Budget that is a net spend – over £25Bn over the next 5 years, from what I can make out!
Bearing in mind the recent Budgets have always tried to be relatively neutral – some spend here, some tax here – this is exactly the opposite of what everyone was expecting. And yet everyone appears to be completely calm about it, especially the markets.
This is because it isn’t the hundreds of billions the Labour Party at one point said they wanted to invest. The extra borrowing Mr Hammond will have to do to meet his spending commitments – assuming the rest of his sums add up – isn’t too large. So he’s managed a bit of a spend giveaway without any drama. Keep calm and spend on.
Homes – even for the homeless
The Budget always ends with a Rabbit-out-of-the-hat moment, and today’s was a immediate scrapping of Stamp Duty for First Time Buyers for houses under £300,000.
This is not a surprise for the Conservatives, who have always wanted to boost home ownership. It’s a nice scheme, and it’s in tandem with pledges to boost housebuilding, especially to encourage more small and medium homebuilders to try and get into the game. Interestingly Mr Hammond threatened homebuilders with compulsory purchase orders if they don’t build on land that they hold. While this may sound tough, it depends if there’s a reason for builders not to build – such as a labour or skills shortage(!)
The Government has also pledged to do more to end homelessness, with a pledge to end homelessness by 2027. This is certainly laudable, but without extra investment in mental health and drug rehabilitation, neither of which is mentioned in the Budget report, feels like an empty promise.
The key one for me was a commitment to spend £28m on helping the victims of Grenfell Tower, including mental health support and counselling. While these are welcome – indeed the Government is obligated morally to do this – would this be necessary if there were better support for mental health in general? If we truly had parity of mental & physical health the Government once pledged?
The other key point was allowing the Scottish police and fire services to get refunds on VAT from April 2018. While this doesn’t sound like much, this was politically necessary given the noise coming from the various Scottish political parties.
As always though, I look for the titbits. Some key points are:
- £335 million of extra funding for the NHS to be provided this year, to help the NHS to increase capacity over winter, and £1.6 billion will be provided in 2018-19 – taking the overall increase in the NHS’s resource budget next year to £3.75 billion.
- A £1.5bn package to “address concerns” about the delivery of universal credit, with new claimants entitled to 100% advance payments within five days of applying from January.
- Tax-free personal allowance on income tax to rise to £11,850 in April 2018, with the higher-rate tax threshold to increase to £46,350.
- The Northern Powerhouse, a pet project of the former Chancellor, George Osbourne, gets a mention. Money for the former Redcar steelworks site, the Tyne & Wear Metro, and extra investment & devolution on the cards for Greater Manchester & Liverpool.
- “A further £36 million of banking fines over the next 3 years to support Armed Forces and Emergency Services charities and other related good causes.”
- Young person’s railcard extended to 26-30-year-olds, giving a third off rail fares.
- Modest changes to Business Rates, including making revaluations more frequent but hopefully less dramatic.
Opinion – Money needed, but there were better opportunities
I’ve been arguing that the Government, of whatever colour, needs to use this era of low interest to borrow more to pump into the economy. The theory is, more money invested (e.g. in infrastructure projects) means more people employed or with better jobs, we spend more, government gets the money back in tax. This has to be done robustly, so that the investors (usually pension funds and the like) who lend UK Plc the money don’t get spooked that we borrow more than we can afford, but the time seems to be right to level off on Austerity and try a different approach.
To that end, a Spending Budget seems to be a good call – as long as cash is flowing to where it needs to be. And while a boost to the NHS is long overdue, and money to resolve issues with Universal Credit essential if confidence in this new simpler benefit is to be restored, money for a stamp duty freeze doesn’t cut it to me.
Two reasons. One, there is much more pressing needs – funds for public sector pay would have a huge boost to the economy as well as the moral justification that employees with a 7-year pay freeze need the boost. More infrastructure spend and regeneration projects to prepare the country for a post-Brexit world seems fair. A revolution to the Business Rates would give the SME (Small & Medium Enterprise) sector a much-needed boost in the arm and allow them to invest – and SME’s to a certain extent are our future. More road & rail investment would potentially help to address the Productivity Gap. Doing more for the Northern Powerhouse would help rebalance the UK and alleviate pressure on the infrastructure and housing in the South-East.
But more importantly getting more young people to buy houses will only make the housing price bubble worse by increasing demand now when plans to improve supply are at least 2 years off (assuming the Government’s proposals to speed up house building actually work). Young people are only too willing to buy homes, but can’t either get the deposit together because of the price of renting, or are priced out of their area.
Rent controls could help here, especially in certain areas. Targeted help-to-buy, especially for those in the public sector such as teachers and nurses, to guarantee their deposits and allow them to pay back later on, would be a huge boost.
But ultimately the housing market won’t be resolved until less people own second homes / timeshare holiday homes, and more houses are built. So I would have flipped the Budget today – more focus on house building now, and (if I were politically cunning) keep the scrapping of stamp duty for first time buyers until these houses were built and we were closer to the next General Election.
I fear Mr Hammond may have committed to try and get more money into the economy and try and get us talking less about Brexit – but has ended up sending good money after bad. Only time will tell.