One and a half cheers for “Spreadsheet Phil”

12 mins. to read
One and a half cheers for “Spreadsheet Phil”

Mr Hammond’s first and last spring budget was a cosh delivered to the growing army of the self-employed (white van drivers to barristers) and micro-company directors (interior designers to marketing consultants), concealed in a velvet glove of fiscal reassurance.

The good news is that the British economy is still relatively dynamic relative to its peers; the bad news is that growth prospects mean that “austerity” is likely to be the order of the day for another decade. Mr Hammond and his team are competent pragmatists; but, worryingly, there is little evidence of long-term strategic thinking in Whitehall.

A strong hand on the fiscal tiller

The United Kingdom is not going to go broke any time soon and its citizens will continue to enjoy relatively good levels of employment and economic growth (though whether that growth translates into rising wages is another matter). Even though productivity growth is still lagging badly. That was the un-ecstatic message that the Chief Accountant – sorry, Chancellor of the Exchequer – delivered to the House of Commons on 08 March.

To be fair, the Chancellor had already indicated that this budget would be uneventful and that the main event will take place in the late autumn. This was always to have been an exercise in fiscal correction with regard to areas of outrageous dysfunctionality: such as the revaluation of business rates and the inability of local governments to meet their obligations for the care of the elderly.

Deficit Blues

OBR forecasts suggest that the UK government will still be running deficits well in to the 2020s. It is welcome that the government will need to borrow £16 billion less than expected this year but the deficit for 2017-18 will be £58.3 billion – up from £51.7 billion this year. Public sector net borrowing will be 2.6 percent of GDP this year – well within the Maastricht criteria as the Chancellor mused, whimsically.

Debt-to-GDP will peak at 88.6% next year and will thereafter decline to 79.8% in 2021-22. All this betokens a continuation of “austerity”. “We will not saddle our children with ever-increasing debts”, said the Chancellor, having revealed that the national debt will be just below the staggering £2 trillion mark by the end of this parliament.

The OBR forecasts that inflation will be 2.4 percent this year before declining somewhat. The real challenge is that real disposable wages will hardly have budged since 2008.

The growth outlook is a curate’s egg. The OBR now forecasts a better 2018 but a weaker 2019. Growth forecasts do not come near the UK long-term trend growth rate of 2.4 percent over 1945-2008. The deficit will supposedly be £16 billion in 2021-22. We shall see.

The OBR forecasts that inflation will be 2.4 percent this year before declining somewhat. The real challenge is that real disposable wages will hardly have budged since 2008.

The productivity conundrum

Mr Hammond said that while employment stood at record highs, productivity remained “stubbornly low”.

He believes, as did nearly all of his predecessors of either political colour, that the productivity gap between the UK and Germany of some 35 percent (his figure) can be closed by programmes of investment in training and infrastructure. While those programmes would no doubt be beneficial, this prescription reflects a failure to understand the nature of the problem.

The relative slump in UK productivity is partially the result of its flexible labour markets, permitting transition from full-time work to part-time work and back again (“job-sharing” is a case in point) and the fact that the UK has maintained higher levels of employment than its European counterparts post-Credit Crunch: it had one of the few labour markets to respond to declining demand by cutting real wages.

Furthermore, mass immigration by low-skilled workers, not least from Eastern Europe, may have boosted, for example, farming and food processing, but has done very little to stimulate GDP-per-capita.

In fact, the UK can boast many hyper-productivity hot spots. The Nissan car factory in Sunderland is said to be one of the most efficient car plants in the world.

Mr Hammond announced a £23 billion infrastructure fund in last year’s Autumn Statement. On Wednesday he announced further measures to stimulate research and development, education and skills, transport infrastructure and “full fibre” broadband networks. These are all good things; but the lead time in terms of their impact on productivity could stretch to decades.

The digital economy: possible tax reforms?

The Chancellor announced that Matthew Taylor – former adviser to Mr Blair, Chairman of the goodly RSA and pillar of the BBC’s Moral Maze – is to chair a task force to consider the wider implications of different employment practices. The gut instinct of career politicians when confronted by a strategic problem is to appoint a member of the great and the good to chair a committee. Don’t hold your breath.

Corporation Tax to remain competitive

What we know about corporation tax is that if it is too high, in a globalised world, corporations will find ways to circumvent it. The Chancellor confirmed that corporation tax will fall to 17 per cent by 2020 – the lowest in the G20. He said that the UK needs to become the “best place to start a business”. From April this year, corporation tax will fall to 19 per cent.

Those on the left who talk about a race to the bottom in the corporation tax stakes ignore the fact that companies can relocate technical profit centres much more easily than they can relocate labour or capital.

Mr Hammond knows that after the USA slashes taxes on company profits – possibly later this year – US corporations, amongst others, will reconfigure their international operations. Our neighbour, the Republic of Ireland will still have lower corporation taxes than us. Those on the left who talk about a race to the bottom in the corporation tax stakes ignore the fact that companies can relocate technical profit centres much more easily than they can relocate labour or capital.

More stealth taxes

As usual, the fine print of the budget statement confirmed a slew of niggardly taxes which the Just About Managing won’t even notice being taken from their pockets. As previously announced in the 2016 Autumn Statement, Insurance Premium Tax (IPT) will rise from 10 percent to 12 percent on 01 June 2017. A new minimum excise duty on cigarettes will be introduced from 20 May 2017 and a pint down the local will cost another 2 pence.

The Soft Drinks Industry Levy, or sugar tax, was confirmed at 18 pence per litre (for sugar content of 5 grams or more per 100 millilitres) and 24 pence a litre (for sugar content of 8 grams or more 100 millilitres) on fizz. £1 billion from this tax will be invested in school projects, confirming Mr Osborne’s misguided tendency to hypothecate tax proceeds to good causes.

Hypothecated taxes are normally associated with developing countries where competing interest groups need to be bought off. In the UK, no new tax initiative can now be taken, however wrong-headed, without accompanying displays of virtue-signalling. Perhaps the money for school projects should be repaid if children continue to get fatter. The sugar tax will raise just £380 million per year rather than the £520 million originally estimated, as producers are already reducing the sugar content of drinks. It must be working…

Social Care

The Chancellor announced a further £2 billion to be paid to local councils in England over the next three years to fund social care – the cost of looking after elderly folk in care homes. He confirmed that proposals for funding social care will be considered in an upcoming green paper. I speculated earlier this week that this will probably involve some element of wealth stroke inheritance tax.

Mr Hammond reminded us that today there are a half a million more people aged over 75 than when Mr Cameron came to power in 2010 – and there will be two million more in ten years’ time. This is one problem that will be around for longer even than Brexit.

I know from personal experience that this problem is not just about funding for local government. Needy seniors who have the means to pay for their own care remain outside the purview of Social Services. They are free to make their own care arrangements. But there is a desperate shortage of places available in decent care homes. Long waiting lists are common. Hence people like an elderly relative of mine languish in hospital waiting for a care home place, thus adding to the strain on the NHS (and risking hospital-borne infections like MRSA).

Messing with the self-employed

And then there is the little matter of Mr Hammond’s hiking Class 4 NICs – the rate at which self-employed people pay National Insurance Contributions – from 9 percent to 11 percent. (Class 1 NICs paid by employees remain at 12 percent).

He does have a point here. Hitherto, the self-employed were an underclass – quite literally second-class citizens who would never receive the same benefits or state pension as the employed. They had no entitlement to the State Second Pension (SP2 or the “top-up” pension). Now, with the introduction of the Basic State Retirement Pension for all – employed and self-employed – things have changed – somewhat. And Class 2 NICs on the self-employed (£2.85 a week) are to be scrapped in April next year.

With nearly five and a half million self-employed people in the UK, or 15 percent of the work force (not just low-paid workers but also artists, writers, opera singers and other assorted trendy moonlighters), there is a significant impact on the tax base. The Treasury is not just losing out because the self-employed pay a lower rate of NIC, but also because they receive no Employer’s NIC (at rate of 13.8% above the Primary Threshold of £8,164) on their income. Taken together, Mr Hammond told us, self-employment is “costing” the Treasury £6 billion per year.

Remember that many people are employed and also have income from self-employment. When a Tory MP appears on the Andrew Marr Show, his or her £200 fee (or whatever it is) should be declared on their tax return as income from self-employment.

This attack on the self-employed sends out the wrong signal.

The self-employed pay less tax because, if they are canny, they reduce their taxable profits by all legitimate business expenses (including motoring expenses) that they can justify. (That Tory MP can reduce his £200 of earnings by the cost of the taxi fare to the BBC studio). And in my experience HMRC is generally obliging.

But the self-employed still don’t enjoy the same privileges as employed people. They do not receive statutory benefits – sick pay, maternity/paternity pay, adoption pay. Mr Hammond has promised to look into this. In fact, if they lose all their customers, self-employed people can’t even get Job Seeker’s Allowance until they de-register. And they have to set up and pay into their own pension pots. Many self-employed people effectively work for less than the minimum wage with no right of redress.

Think tanks like the Resolution Foundation argue that self-employment has sustained employment levels in the British economy – especially since the Credit Crunch. Our European neighbours make life difficult for what the French call liberal professions – and they have higher unemployment than we do. In the post-Brexit economy we shall need the most dynamic labour market possible. This attack on the self-employed sends out the wrong signal.

If Mr Hammond had unequivocally said “I am going to harmonise benefits received by the self-employed with those received by employed people – but they must now pay the same rate of NIC” I think we would have gone along with that one. Instead he has created a hodgepodge which risks being struck down in the House of Commons.

The ghost at the feast

The Chancellor made no reference to Brexit during his hour long budget speech. The major downside risk of Brexit, as I have discussed elsewhere, is that by leaving the Single Market and the Customs Union, frictions will be generated on trade between the UK and its European trading partners. This could take the form of tariffs, in accordance with WTO rules; but the more damaging form of friction would take the form of, for example, inspections of trucks containing British exports at Calais or wherever. Many fear that this could impact the overall level of trade – and therefore jobs.

I will explain soon why such frictions could actually be an opportunity to repatriate supply chains in, for example, the automotive industry, back to the UK. The Chairman of Peugeot SA (EPA:UG), now owner of Vauxhall Motors in the UK, has suggested that in the event of a hard Brexit, it would be wise for PSA to maintain production facilities on the other side of the fence, so as to serve the UK market without impediment.

For now, these considerations remain in the realm of speculation. Mr Hammond will only say that he needs to make the UK match fit for Brexit.

Grasping the nettle

So no prospect, thus far, of any reform of the absurdities of an out-of-control welfare state. Early next December, HRH the Prince of Wales and Lord Sugar will continue to receive their winter fuel payments and their 2018 bus passes will be despatched by post (not that they ever travel by bus – but someone still has to pay for those bus passes).

Wealthy pensioners will continue to receive free TV licenses (now paid by the BBC itself thus forcing up the license fee for non-pensioners) and people who normally buy their own lunch will eat hospital food for free. Pregnant foreign mothers-to-be will still fly to London to have triplets courtesy of the British taxpayer.

The foreign “aid” budget will continue to be set (unlike defence or indeed any other department) as a fixed arbitrary percentage of GDP (and not of tax receipts); with the result that sub-Saharan girl bands will continue to prosper at the expense of the abandoned veterans of Mr Blair’s wars.

The UK is possibly the last country with a fixation on the Renaissance vision of the universal cornucopia. France, Germany and the Nordics have generous welfare states but their welfare payments are very tightly targeted. And the problem is worst in semi-autonomous Scotland where an administration that is determined to destroy the country of which it is a part is given a virtual blank cheque to buy popularity while running down the Scottish economy.

The verdict

I hear that the threat of a snap general election – supported earlier this week by Lord Hague – is now off the table. Mrs May has lost political capital by opening herself to the accusation of reneging on a manifesto commitment. The Tories have a wafer thin majority and it is possible this budget will be mauled in the Commons at the very moment that Article 50 is about to be “triggered”. But the markets will be reassured that the national finances are not going to get noticeably worse – for now.

As Janice used to say on Thank Your Lucky Stars: “I’ll give it foive”.

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