Budget 2018 – Rabbits, PFI & Lavatories (yes, really)

I shouldn’t ever make predictions – apparently I’m as accurate as Mystic Meg!

Whoops!

But before we get onto how I was wrong (*sigh*), let’s look at some of the detail of this Budget, the first delivered on a Monday since 1962.

Theresa May & the Rabbits

The Budget is when the UK Government of the day outlines its high-level spending and tax decisions for the next year (and often beyond). Most of it is dry and technical, especially when you read the formal report (106 pages this year), but it impacts things like how much you can earn tax-free, benefits, petrol, alcohol, and in this year’s case, lavatories. Budgets usually end with the Chancellor of the Exchequer (the Finance Minister essentially) “pulling a rabbit out of their hat” with a key announcement that really impacts us ordinary folk, and distracts us from the horrible nasty stuff.

With this year’s Budget Philip Hammond had to admit “some of my star bunnies appear to have escaped a bit early” as certain announcements had been pre-announced, with the Prime Minister Theresa May having already announced £20 Billion extra for the NHS. This made it a slightly unusual Budget, and part of the reason I fully expected this to be a non-event; surely if Theresa May had already committed a huge amount of spend, and with Brexit completely constraining how many new taxes Mr Hammond could implement, surely there would be nothing much to announce except to reiterate previous committed spend.

Not so.

Austerity Ends – As a Concept, anyway

Mr Hammond made many references in his speech that “era of austerity is finally coming to an end.” Bearing in mind I write these blogs as politically neutral as possible, let me explain why I think he’s right – to a point.

Austerity was always a political choice, and it was always sold on the premise that, with Government borrowing at record levels and increasing every year, a reign had to be brought in on public spending. This seems logical – if a family was £20,000 in debt and borrowing £5,000 more a year, it wouldn’t be long before all the lenders would foreclose and want their money back. And with the bond investors and pension funds getting twitchy, getting a grip on public spending had a certain logic to it in 2010.

However, the logic doesn’t necessarily hold true. During the Great Depression in the 1930’s America, Roosevelt’s New Deal significantly increased taxes and borrowing so it could spend heavily, significantly on infrastructure projects. The logic was by spending more on infrastructure and public works, it would mean many unemployed would be hired, they’d earn a salary, which could be taxed, which would end up back in the government again. (For balance, I should add the efficacy of the above is heavily debated in economic circles).

In short, while getting to grips and reviewing all Government spending should always be a prudent start for any new Government, a limited amount of borrowing to stimulate the economy isn’t necessarily a bad thing, if done in a controlled fashion. The choice to not only rule this option out, but to immediately constrain government activity to try and balance the annual deficit by 2015 (a target still not reached) was a political choice. The merits of which are beyond the scope of this blog to debate, but it must be acknowledged this is a choice.

A choice Mr Hammond appears to have turned his back on. And how! Last year I commented how Mr Hammond had announced a relaxation of some of the deficit rules by committing to spending £25Bn over the next 5 years.

This Budget shows he plans to spend an extra £15 Billion a year, and up to £30Bn extra by 2023. Simply extraordinary, given that with Brexit 6 months away and with no formal deal agreed at time of writing, no-one knows for sure what will happen in 6 months time – least of all Mr Hammond, who admitted the Spring Statement might need to be upgraded to an extra Budget if this were to materialise.

Truly, the principles of (former Chancellor) George Osbourne, and Austerity as a Government concept, is over.

(How this feels to the ordinary families is of course, totally different).

Universal Credit

So where is all of this being spent?

The biggest spends in the Budget are the NHS and Universal Credit. Universal Credit as a concept sounds benign – merging 6 benefits into one, and arranging it so that when claimants return to work, they can still keep some of their benefits (to avoid the situation where people could be better off on benefits than working part time) and it slowly taper off as they earn more. However the implementation of it has caused major issues and hardship, with many turning to food banks. To try and remedy this situation / save face (depending on your political standpoint) Mr Hammond has pledged £1 billion into the scheme.

How I was Wrong

Some of the extra spend is smaller in economic terms, but more significant in political terms – as well as proving my predictions wrong.

Mental Health

“The NHS will invest up to £250 million a year by 2023-24 into new crisis services, including: 24/7 support via NHS 111; children and young people’s crisis teams in every part of the country; comprehensive mental health support in every major A&E by 2023-24; more mental health specialist ambulances; and more community services such as crisis cafes.” (page 75 of the Budget report).

However, there is no extra funding for this – this is coming out of the £20 billion previously committed to the NHS. While boosting mental health is to be commended , without the extra funding it’s hard to see how the NHS can deliver this, and if it will be in a coordinated and consistent way across the UK. The Budget details this will happen, but it is for the Ministry of Heath & Social Care to deliver this.

Business Rates

“To provide upfront support through the business rates system, the government is cutting bills by one-third for retail properties with a rateable value below £51,000, benefiting up to 90% of retail properties, for 2 years from April 2019” (page 46 of the Budget report).

Again the devil is in the detail here. For Retail properties will this be limited to buildings defined as for retail use (i.e. Class A usage) or will it include light industrial workshops and business units. This doesn’t appear to be specified in the Budget itself, so we will have to wait and see. Also to be confirmed is what will happen after the 2 year relief runs out. The fear for small businesses, especially home businesses looking to expand, is that in 2 years they end up committed in a business premises they can no longer afford. Reform is urgently needed in this area (as many High Streets will attest to).

Interestingly:

“The government will introduce 100% business rates relief for all public lavatories to help keep these important local amenities open.” (page 46 of the Budget report).

“The only announcement that didn’t leak”, as Mr Hammond quipped.

Schools & Justice

£535 million has been announced as a one-off increase this year, but I think it’s fair to say it won’t be enough to appease the Secret Barrister, campaigning for justice funding reform, or those campaigning for school funding reform (or increases!).

But…no mention of Public Sector Workers

There’s various references to a comprehensive spending review next year (which would probably needed to have happened due to Brexit anyway), so expect this to be deferred even further. It depends how much money is available to the Government post Brexit and how far Mr Hammond wants to abandon the Austerity principles.

Bye bye PFI

…but what was PFI?

PFI, or Private Funding Initiative, was the idea of getting private businesses to fund investments in new schools and hospitals and to be paid back over a number of years. Governments liked it as it meant huge amounts of government borrowing was kept off the public accounts (since it’s the private businesses that borrowed the money and paid the initial outlay) and were just repaid. The UK has embraced this concept since the 1990’s.

However with the UK having such good credit terms it possibly could have been cheaper all round for the Government to borrow the money itself and commit to the spend itself.

Unexpectantly, Mr Hammond announced he would not sign any new PFI deals going forwards.

With IFRS16 coming in and such “leases” coming on balance-sheet, the cynic in me wonders if Mr Hammond would have to have brought these deals on the public books in future anyway, and this was just getting some initiative on this. But this could just be me being a cynic.

What else?

  • £10m for mental health care for veterans, to mark the centenary of the Armistice which brought World War One to an end
  • £1m to fund school trips to World War one battlefields
  • £1.7m in Holocaust education programmes to mark the 75th anniversary of the liberation of Bergen-Belsen concentration camp, in northern Germany

(BBC News, page 81 of the Budget report)

  • An extra £1billion for armed forces, for cyber-capabilities and the UK’s new nuclear submarine programme
  • An extra £500 million for road maintenance (potholes!)

And…a new Digital Services Tax:

“From April 2020, the government will introduce a new 2% tax on the revenues of certain digital businesses to ensure that the amount of tax paid in the UK is reflective of the value they derive from their UK users.” (page 44 of the Budget report).

…i.e. Google and Facebook!

How will I benefit?

Ah yes, not much! BUT…

The personal allowance, which is how much you can earn tax-free, will go up to £12,500 in April, up from £11,850 today. The amount you can earn before having to pay the higher rate of tax will go up from £46,350 to £50,000. This is being brought in a year ahead of schedule. (Because of Brexit? Pure speculation of course…).

Apart from that, not much actually! Fuel duty has been frozen again, and all first-time buyers purchasing shared equity homes of up to £500,000 to be exempt from stamp duty, but the rabbits were truly nicked from the Chancellor’s hat pre-Budget day.

In conclusion…

Credit where credit is due, Mr Hammond did manage to make numerous policy announcements which didn’t need huge amounts of £££, bearing in mind his next door neighbour at Number 10 had already spent all of the money.

I applaud Mr Hammond for pledging to never sign another PFI deal. It remains to be seen how the commitment to infrastructure spending will work going forwards and hopefully the lack of PFI will not mean less investment in schools and hospitals.

Changes to never signing PFI agreements don’t “cost” anything (except for future investment spend) and in the era of post-Carillion is probably quite prudent. Philosophically however it does represent a remarkable shift from 20 years of Government policy and showing how this Chancellor is different enough from his predecessors.

But he’s constrained by Brexit, constrained by idealism of reducing taxes to businesses and by previous policy announcements. Quite simply, Government has been so busy in preparing for Brexit other policies which were in planning pre-Brexit, such as income tax / national insurance reform and (potentially) business rate reform have been put on the back burner. These policies are sorely needed and sorely needed now.

Changes to personal allowances are helpful as is the extra investment in Universal Credit but it will take a lot to rebuild trust in this tainted project. Extra commitment into Mental Health is to be commended but needed the ring-fenced funding to truly cement it.

However investment in schools and justice were limited to just this year, and the spending review deferred to next year. While it can be understood that he wants to wait and see what happens with Brexit before committing to further spending it does feel that some areas of the Budget were limited to quick fixes, and not representative of a longer term investment or funding strategy.

Postponing the corporation tax funding could have really help with this, but couldn’t be considered against the backdrop of needing to tempt investment into the UK in the post-Brexit world.

In summary, portraying himself as a Chancellor turning his back on Austerity and PFI as political concepts was a brave move. We can only but wonder how much further Mr Hammond could and should have gone if he wasn’t hamstrung by the realities of Brexit.

Michael Hardy
29 October 2018

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