The last Spring Budget will go down as a modest but still controversial affair, with most of the criticism reserved for Philip Hammond’s reform of national insurance contributions for the self-employed. But the Budget also provided a reminder that there is a long road ahead when it comes to mending the public finances, despite their improvement in the short-term.
The March 2017 Budget was special for many reasons. For me the fact that this could have been the last of these spring rituals was a source of regret. It is not quite like taking Christmas away but there was something about these occasions which fitted the rhythm of the seasons. Philip Hammond was good enough to remind us that he is not the first chancellor to abolish the spring budget and that the last one to do so, Norman Lamont, did not last long enough to deliver the first of his unified autumn budgets. That was in 1993, and it was not until 1998 that spring budgets made a comeback under Gordon Brown. I would not rule out a future chancellor announcing with a flourish their return, no doubt to resounding cheers from the House of Commons. In the meantime, there will be something missing in March.
This last (for now) Spring Budget managed something rather unusual. It was both surprising and unsurprising at the same time. The unsurprising bit was straightforward enough. In the old days, we tried to glean secrets from reluctant ministers and officials. In recent times, however, those secrets have been pretty fully briefed, often by the chancellor himself.
So, there was the expected short-term help for social care, £2bn over three years, combined with a promise to publish a green paper on long-term reform before the year is out. There was also some help for businesses facing steep rises in rates as a result of revaluation, including a £1,000 one-off cut in 2017/18 for most pubs. All this was expected, as was an upward revision to the Office for Business Responsibility (OBR) growth forecast for this year from 1.4% to 2%, and a significant downward revision of this year’s budget deficit. Last time I wrote here I pointed out that the monthly public finance figures pointed to a big undershoot of the OBR’s November public sector net borrowing forecast for 2016/17 of £68.2bn. The undershoot, due to a combination of one-off timing effects and methodological changes, was however much bigger than expected, slashing the OBR’s new borrowing forecast to just £51.7bn.
Armed with just the above information, it would have been very easy to conclude that Hammond had no need to deliver any pain in the Budget. The economy, it seems, is going swimmingly and the social care and business rates packages were not large enough to break the bank, particularly after a big borrowing undershoot. This, however, was where the Budget genuinely did surprise.
Though an increase in national insurance contributions for the self-employed had been speculated about beforehand, my expectation was that it would be part of the ongoing review by Matthew Taylor, head of the Royal Society of Arts, into new ways of working. It seemed unlikely that the chancellor would risk a controversial change, and break a Conservative manifesto promise, at such a sensitive time in the Brexit process. But the chancellor made his announcement, a 1% increase in class 4 NICs in April 2018 and a further 1% increase a year later, together with a reduction from £5,000 to £2,000 in the recently introduced dividend tax allowance.
The reason he did so was because of a second surprise; a much more downbeat set of OBR forecasts than had been expected. 2016/17’s big fall in borrowing, for all its effect on future years, might as well not have happened. Indeed, it leaves the chancellor with the uncomfortable prospect of a rise in borrowing in the coming fiscal year, 2017/18, and an end-point in the early 2020s when borrowing is slightly higher than the watchdog expected in November. It sees no good evidence that Hammond will achieve his ambition of a budget surplus in the next parliament. Driving this view, in turn, is the OBR’s view that there is only so much growth Britain can have in coming years because of capacity constraints, and that any short-term boost, as in recent months, will be paid for in slower growth later. The chancellor takes these forecasts seriously, not least because they chime in with his own views. Moreover, they give him the rationale for delaying any fiscal boost until it is needed.
The chancellor is also a tax reformer at heart. He hates the unnecessary complexity of the tax system, and he hates any unfairness and distortions within it. That is why he decided to grasp the nettle of NIC reform for the self-employed early, not least to stem a growing tide of lost revenue. The experience of recent days shows, however, how hard reform is, even if his NIC announcements have drawn glowing praise from the Institute for Fiscal Studies and Resolution Foundation. Theresa May’s announcement that the NIC changes would not be in the Finance Bill but included as a part of a bigger package for the self-employed, following the Taylor review in the autumn, shows Downing Street’s real fear of defeat at the hands of Tory backbenchers opposed to the move. Even without the breaking of the Tory 2015 manifesto pledge not to raise NICs or the other main taxes, there would have been opposition within the party. The chancellor’s announcement that the class 4 NI rises would be scrapped came exactly a week after the Budget. As U-turns go it was a pretty spectacular one and reflects badly on the Treasury, though George Osborne had plenty of experience of budgets that unravelled before the ink was dry. Even Hammond’s excuse, that the proposed NI increases fell foul of the spirit of the 2015 manifesto, sounded a bit mealy-mouthed.
That the public finances remain fragile and the chancellor is not prepared to take any chances with them. That the economy is still facing a period of slower growth as Britain exits the EU, despite its resilience so far. And that reforms that create losers are as sensitive now as at any time. The government experienced that before the Budget with business rates, and it has discovered it since with the NIC reforms. With hindsight those reforms could have been introduced in a rather better way. The hope has to be that the experience has not put the chancellor off embarking on further reforms in future. That would be a pity.
The last Spring Budget will go down as a modest but still controversial affair, with most of the criticism reserved for Philip Hammond’s reform of national insurance contributions for the self-employed. But the Budget also provided a reminder that there is a long road ahead when it comes to mending the public finances, despite their improvement in the short-term.
The March 2017 Budget was special for many reasons. For me the fact that this could have been the last of these spring rituals was a source of regret. It is not quite like taking Christmas away but there was something about these occasions which fitted the rhythm of the seasons. Philip Hammond was good enough to remind us that he is not the first chancellor to abolish the spring budget and that the last one to do so, Norman Lamont, did not last long enough to deliver the first of his unified autumn budgets. That was in 1993, and it was not until 1998 that spring budgets made a comeback under Gordon Brown. I would not rule out a future chancellor announcing with a flourish their return, no doubt to resounding cheers from the House of Commons. In the meantime, there will be something missing in March.
This last (for now) Spring Budget managed something rather unusual. It was both surprising and unsurprising at the same time. The unsurprising bit was straightforward enough. In the old days, we tried to glean secrets from reluctant ministers and officials. In recent times, however, those secrets have been pretty fully briefed, often by the chancellor himself.
So, there was the expected short-term help for social care, £2bn over three years, combined with a promise to publish a green paper on long-term reform before the year is out. There was also some help for businesses facing steep rises in rates as a result of revaluation, including a £1,000 one-off cut in 2017/18 for most pubs. All this was expected, as was an upward revision to the Office for Business Responsibility (OBR) growth forecast for this year from 1.4% to 2%, and a significant downward revision of this year’s budget deficit. Last time I wrote here I pointed out that the monthly public finance figures pointed to a big undershoot of the OBR’s November public sector net borrowing forecast for 2016/17 of £68.2bn. The undershoot, due to a combination of one-off timing effects and methodological changes, was however much bigger than expected, slashing the OBR’s new borrowing forecast to just £51.7bn.
Armed with just the above information, it would have been very easy to conclude that Hammond had no need to deliver any pain in the Budget. The economy, it seems, is going swimmingly and the social care and business rates packages were not large enough to break the bank, particularly after a big borrowing undershoot. This, however, was where the Budget genuinely did surprise.
Though an increase in national insurance contributions for the self-employed had been speculated about beforehand, my expectation was that it would be part of the ongoing review by Matthew Taylor, head of the Royal Society of Arts, into new ways of working. It seemed unlikely that the chancellor would risk a controversial change, and break a Conservative manifesto promise, at such a sensitive time in the Brexit process. But the chancellor made his announcement, a 1% increase in class 4 NICs in April 2018 and a further 1% increase a year later, together with a reduction from £5,000 to £2,000 in the recently introduced dividend tax allowance.
The reason he did so was because of a second surprise; a much more downbeat set of OBR forecasts than had been expected. 2016/17’s big fall in borrowing, for all its effect on future years, might as well not have happened. Indeed, it leaves the chancellor with the uncomfortable prospect of a rise in borrowing in the coming fiscal year, 2017/18, and an end-point in the early 2020s when borrowing is slightly higher than the watchdog expected in November. It sees no good evidence that Hammond will achieve his ambition of a budget surplus in the next parliament. Driving this view, in turn, is the OBR’s view that there is only so much growth Britain can have in coming years because of capacity constraints, and that any short-term boost, as in recent months, will be paid for in slower growth later. The chancellor takes these forecasts seriously, not least because they chime in with his own views. Moreover, they give him the rationale for delaying any fiscal boost until it is needed.
The chancellor is also a tax reformer at heart. He hates the unnecessary complexity of the tax system, and he hates any unfairness and distortions within it. That is why he decided to grasp the nettle of NIC reform for the self-employed early, not least to stem a growing tide of lost revenue. The experience of recent days shows, however, how hard reform is, even if his NIC announcements have drawn glowing praise from the Institute for Fiscal Studies and Resolution Foundation. Theresa May’s announcement that the NIC changes would not be in the Finance Bill but included as a part of a bigger package for the self-employed, following the Taylor review in the autumn, shows Downing Street’s real fear of defeat at the hands of Tory backbenchers opposed to the move. Even without the breaking of the Tory 2015 manifesto pledge not to raise NICs or the other main taxes, there would have been opposition within the party. The chancellor’s announcement that the class 4 NI rises would be scrapped came exactly a week after the Budget. As U-turns go it was a pretty spectacular one and reflects badly on the Treasury, though George Osborne had plenty of experience of budgets that unravelled before the ink was dry. Even Hammond’s excuse, that the proposed NI increases fell foul of the spirit of the 2015 manifesto, sounded a bit mealy-mouthed.
That the public finances remain fragile and the chancellor is not prepared to take any chances with them. That the economy is still facing a period of slower growth as Britain exits the EU, despite its resilience so far. And that reforms that create losers are as sensitive now as at any time. The government experienced that before the Budget with business rates, and it has discovered it since with the NIC reforms. With hindsight those reforms could have been introduced in a rather better way. The hope has to be that the experience has not put the chancellor off embarking on further reforms in future. That would be a pity.
The last Spring Budget will go down as a modest but still controversial affair, with most of the criticism reserved for Philip Hammond’s reform of national insurance contributions for the self-employed. But the Budget also provided a reminder that there is a long road ahead when it comes to mending the public finances, despite their improvement in the short-term.
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