Phil’s ‘pills, bills and drills’ as austerity is binned - but where was Brexit?

23/11/2016

Charles Ansdell, Managing Director of Professional and Financial Services

Phil’s ‘pills, bills and drills’ as austerity is binned - but where was Brexit?

Overview

In the first post-Brexit Autumn statement, Philip Hammond delivered a masterclass in failing to mention the elephant in the room – citing Brexit only briefly at the start of his speech as he unveiled a more Keynesian approach to addressing economic challenges.

Even if he barely mentioned the word, the measures announced were very much of a government seeking to assuage the uncertainty and headwinds of Brexit. This was not surprising – in the detail of the small print, the OBR’s estimates show the cost of Brexit will be close to £60 billion and leave a vast black hole in the UK’s finances.

In a speech that was more evolution than revolution, he frequently referenced George Osborne’s achievements and building upon those, rather than disowning the previous government.

Whether this continuity appeases the 50% or so of the electorate who voted for significant change will become clear over the next 24 hours, although the right-wing media initially welcomed the announcements (many of which had been heavily trailed).

Hammond revelled in a more sober approach – gone were the Osborne’s showpiece triumphal lines of “fixing the roof while the sun shines” and “Britain can only spend what it can afford”. Instead Hammond struck a low-key tone, though he managed to score some good barbs at Labour’s expense.

Ultimately though, this is an Autumn statement that will be remembered as marking an end of the era of austerity.  Although Hammond moved to justify the change of policy to “spend” using the “solid base” that Osborne had achieved, in reality a 2020/ 2021 budget surplus became impossible once the OBR had showed a projected 2.4% less growth following Brexit.

With growing debt increasing exacerbated by recent QE, Hammond was forced to walk a tightrope to try and balance debt vs. spending – prioritising investment in infrastructure and innovation while using additional borrowing to fund selected, Conservative-friendly policies.

The specific targeting of the JAM (Just About Managing) demographic, through increasing the living wage and reducing the taper on the universal credit, is arguably a reversal of previous Conservative policy failure.

Commentators may also be quick to note the focus on infrastructure investment echoes similar rhetoric coming from Trump et al across the pond. With noises about the US reducing corporation tax to 15%, Hammond stuck to the commitment to drop corporation tax to 17%. In similar echoes, he announced a further £23 billion of investment in productivity investment, along with transport infrastructure and home building initiatives.

Maybe this indeed will be the legacy of the seismic political movements that saw Brexit and Trump elected – a return to significant investment in infrastructure, housing and wage support in a “New Deal” style arrangement. This may also mark the end of the era of solely monetarist thinking in major Western markets as Keynesian-style thinking looks to solve the inequality and social issues caused by the 2008 financial crisis.

Productivity and infrastructure

The biggest change in focus in the Autumn statement focused on the end of austerity and a commitment to greater investment in infrastructure.  

Hammond put raising productivity as a key focus to creating growth, creating a new £23 billion productivity investment fund and additional £2bn a year in R&D funds. 

As expected, addressing the housing shortage remained a key focus of the statement, with a £2.3 billion housing infrastructure fund to fund 100,000 houses in areas of high demand and a further £1.4 billion fund for an additional 40,000 new homes. He also announced a large scale regional pilot of Right to Buy for Housing Association tenants and maintained the help to buy equity loan scheme and ISA policies.

Transport received an additional £1.1 billion investment in traffic, £450m investment in railing signalling and £390m for low emission vehicles and autonomous vehicles. He also announced a 100% tax free capital allowance for electric car infrastructure investment.

As expected, Hammond announced significant investment in the UK’s technology infrastructure.  The Government committed £1 billion to be invested into fibre networks and 5G. He also announced 100% business rates relief on new investment on fibre infrastructure in the UK.

He also confirmed the Government will invest 1-2% of GDP in infrastructure from 2020 onwards – showing a committed shift from austerity to Keynesian-style spending.

The Government also committed a further £400m of venture capital into the British Business Bank to help take technology companies up to scale, a clear acceptance that while Britain remains a major source of innovation, it fails to turn these into the Googles and Facebooks of this world.

Public spending

Although the OBR shows a projected severe deterioration in public finances, Hammond committed to maintaining public spending along current lines with investment in infrastructure and productivity. That said, he also affirmed already committed spending cuts.

There were some tweaks around the edges. He announced that £1 billion of savings could be reinvested into public spending (which is an alternative way of saying that departments only have to cut £1 billion less). Further, he confirmed the overseas aid budget, the pension triple lock and defence spending.

However, he also made explicit reference to the challenges of an ageing population in perhaps the first nod to the unsustainability of the current triple lock.

Business taxation

As expected, Hammond reconfirmed the business tax roadmap to reduce corporation tax to 17% and kept other March promises as an attempt to maintain confidence with business.  With the real prospect of Trump dropping corporation tax to 15%, there is a possibility this will become a new battleground for countries trying to increase competitiveness (following the currency “wars” of the past few years).

Elsewhere, transitional relief tax and rural relief have been extended as Hammond continued Tory commitments to small business.

However, the insurance industry found themselves in the cross hairs in one of the few publicly cited tax increases. Insurance premium tax rises from 10% to 12% next June. 

Tax avoidance clampdown

It was unrealistic to offer such infrastructure expenditure without clawing back some additional tax. Hammond was explicit about looking at expanding the tax base to make sure the government can fund future commitments.

As was widely flagged, salary sacrifice has been eliminated which will have a significant impact on corporate reward. An interesting point is a lot of pension auto-enrolment schemes are managed through salary sacrifice schemes, so implementing this may be fraught with problems.

While benefits such as company cars will suffer most, some areas were protected – specifically pension savings, childcare, cycle to work and low emission cars.

There were further attacks on “low scale” tax avoidance aimed at slightly higher earners – with money purchase drawdown limited to £4,000.

More substantially, he mentioned the removal of many of the tax planning tools used by the wealthier and self-employed such as the VAT flat rate and the employee shareholder status.

He also reiterated one of the key bombshells from the March budget – that those enabling the use of tax avoidance schemes – most likely accountants, lawyers and tax advisers - will be penalised if the schemes are found to be illegal.

As expected, he also reiterated Government efforts to clamp down on multi-national cross border tax avoidance and he made specific reference to the practice of heavy borrowing in the UK to eliminate corporation tax liabilities.

Hammond gives the JAMs some honey

As expected Hammond reaffirmed the existing Government commitments to raise the £12,500 zero rate income tax threshold and the move to a £50,000 higher rate threshold.   

He committed to raising this rate (at least the zero rate) in line with inflation going forward as part of a series of initiatives targeting JAMs (Just About Managing). The national living wage will increase to £7.50 from £7.20 in April 2017, and low wage families will receive a taper reduction of 65% to 63% on the universal credit. 

Populist takeaways

As expected, the tail end of the statement was committed to more populist measures aimed at pleasing a wide range of the public.

The energy providers will undoubtedly feel a chill as the industry yet again falls into the cross-hairs over the next year to make sure that it’s providing value to consumers (though arguably with oil prices rising and sterling’s devaluation, their hands may be tied in any case.

The heavily flagged abolition of rental fees (e.g. tenancy deposit fees, inventory fees) is likely to be popular. Only Estate Agents – who had seen their share prices drop in anticipation of the announcement – are likely to be affected. Given that Estate Agents are frequently cited amongst the most unpopular professions amongst the general public, this was a safe target. Whether this marks greater targeting of the property industry for regulation remains to be seen.

There was a further nugget offered to the older generation and savers, with the promise that N&SI would launch a new savings bond this year paying up to 2.2% on balances of £3000 (details yet to be confirmed).  

Parents were rewarded with confirmation that the tax free children’s care previously promised will continue to be rolled out over the next year.

Drivers once again were protected from further fuel duty rises – though compared to the impact of rising oil and falling sterling, this is likely to be small change.

Autumn budget from 2017, and Spring statement (but no changes).

Hammond’s last move was to abolish the Autumn statement and replace it with an Autumn budget.  Much to the derision of the house, this also involved replacing the Spring budget with the Spring statement. Hammond tried to explain the OBR mandated Parliament discuss progress twice a year – but it was certainly not the “rabbit out of a hat” moment to thrill and impress the expectant public and media.