RIP Austerity. She was an ugly girl and no one really liked her – though her funeral on Monday was still touching. But has she joined the undead? Victor Hill investigates.
Trick or treat?
The timing of this year’s budget was always going to be fraught. Mr Hammond could not have known back in the summer (when the date was supposed to be fixed) exactly where the country would be in the Houdini-like escapology of exiting the European Union come October-November. In the event he chose to leap before all hell breaks loose in Westminster (as surely it will next month). It was decided, therefore, to hold the budget on Wednesday – the last day of October. Then some bright spark in his entourage realised that that would be Halloween, and anticipated unfavourable headlines – House of Horrors; Budget of the ghouls; Blood on his hands – and so forth. So they decided to hold the budget on a Monday for the first time since 1962.
Never miss an issue of Master Investor Magazine – sign-up now for free!
On Sunday the Chancellor, in a round of TV grillings, indicated that if there were no Brexit deal, then there would have to be another budget, though he did say so, to prepare for the apocalypse. Mr Hammond, whose manner is often funereal, believes that a no-deal Brexit would be a chaotic Brexit: supply chains disrupted, flights cancelled, Marmite shortages and gridlock on the M20 with the M26 motorway converted into the largest car park in the world. (At least if we run out of Champagne, I’m assured that there will be plenty of English fizz, thanks to the bumper harvest.) He also apparently believes, almost alone in the cabinet, that even if there is no deal, Britain will still have to pay the €44 billion divorce payment.
Meanwhile, the poor man has been under increasing pressure from his boss. Mrs May signalled the end of austerity at the Tory Party conference and there is certainly a mood abroad that, after more than eight years of cheese-paring, the British public needs a serving of pudding – otherwise they might become morose and vote in large numbers for Mr Corbyn.
I wrote in this column some months ago about how austerity has hit a wall. Rather like excessive dieting, there comes a point when enough is enough. In the UK one cannot meet a teacher, a clinician, a policeman or a member of the armed forces these days who will not tell you that they are at the end of their tether. They are unable to do their jobs satisfactorily given currently available resources. Even more so, prison officers and care workers, who feel that their backs are against the wall. Mrs May gets this – we know that because she told us so.
Before he stood up in the House, the Chancellor’s brief was to deliver at least the prospect of additional resources for Britain’s strained public services. This could only ever be an exercise in what mathematicians and economists call constrained maximisation. Maximise spending – but subject to three constraints: do not increase the deficit; do not upset the easily panicked middle classes by taxing them perceptibly more; and do not spook the financial markets which are already giddy with Brexit-related anxiety.
To make matters worse, the Government does not command a majority in the House of Commons, except by virtue of their arrangement with the increasingly curmudgeonly DUP; and, as we know, about 80 or so Tory Brexit Ultras have threatened to go into kami kaze mode at any moment. The possibility of spontaneous combustion on the Tory back benches, indeed, has never been higher. For a government to lose a vote on its own Finance Act (budget) would be a terminal blow – there would have to be a vote of no confidence.
What use is a government which cannot even promulgate its own taxes? Either there would have to be a general election (I can already hear the despairing cries of Brenda from Bristol – Not again!) or, more likely, Mrs May would have to go to the Palace to ask HMTQ to appoint Mr Corbyn as Prime Minister. These considerations made this budget of over-arching importance.
It was a Frenchman – I think, Colbert – who said that the art of taxation was to pluck the goose bare, with the minimum amount of hissing. Mr Hammond is not a natural plucker: he is too fastidious, and is rumoured to be uneasy in the presence of poultry. He would, however, have made an excellent Victorian undertaker. At precisely 15:32 hours on Monday the nation’s fate was placed into his elegant, metaphorically black-gloved hands.
A new chapter
The era of austerity is finally coming to an end…
The main theme of the budget was that Britain has turned the corner thanks to Austerity’s more kindly sister, Prudence. The fiscal weather has brightened and it is now possible to pump some additional cash into the system. In practice, however, on close inspection, the main beneficiary of the government’s largesse is the National Health Service. Of the £103 billion of additional spending over the next five years, £83 billion is earmarked for the NHS.
Never miss an issue of Master Investor Magazine – sign-up now for free!
Other government departments are being thrown tasty morsels from the banqueting table. The Ministry of Defence will receive an additional £1 billion this year giventhe scale, scope and complexity of the threats we face – so a two percent pep. That may be just enough to keep Mr Williamson’s pet tarantula in its glass case, for now at least. Councils will be given an additional £420 million to fix potholes; schools in England will receive another £400 million – the equivalent of £50,000 for each secondary school – enough for about 100 new laptops. Another £500 million will be allocated to the housing infrastructure fund. Despite £160 million in fresh funding for counter-terrorism, there was no additional money for prisons or the police. The purse strings have loosened – just a little.
The roll-out of Universal Credit (Mrs May’s poll tax, according to Sir John Major) will be lubricated by an additional £6.6 billion over five years. It will not now be fully operational until 2023. An additional £650 million will made available to councils for social care. In an aside, Mr Hammond announced the euthanasia of the Private Finance Initiative (PFI) – a hideous remnant of Brownian New Labour economics which has made infrastructure projects more expensive.
In a bid to revivify the high street, small shops will from next year pay up to one third less in business rates. Coupled with the digital services tax (see below) it seems that bricks and mortar retailers may be given the chance to fight back.
Mr Hammond spoke of a double deal dividend. This is the idea that, if a deal with the EU can be secured, that will spell the end of Brexit uncertainty at the same time as he releases “some of the fiscal headroom that I am holding in reserve at the moment”. £500 million will be set aside just in case of the no-deal scenario.
In an economy working for everyone there was little cheer for wine drinkers or indeed for the burgeoning English wine industry which might soon compete against inferior foreign imports with a little help from the Exchequer.
Taxing the tech behemoths
The tax rules have not kept pace with the digital economy…
Many people from the far left to the far right – from the Archbishop of Canterbury (whose views I discussed recently) to UKIP’s Gerard Batten – agree that the tech giants – the likes of Facebook, Amazon and Google – are not paying their fair share of tax. The problem is that there is no global consensus in how to rectify this. On Monday, Mr Hammond emerged as a man with a cunning plan. It’s called the Digital Services Tax and it could raise £400 million a year, so Mr Hammond thinks, by 2022.
This new tax will only be levied on global players which generate revenues of at least £500 million a year – so it would not hit small UK tech start-ups. It is proposed that it be set at 2 percent of such revenues but pro-rated to the proportion of total global customers that the entity has in the UK. Of course, the devil will be in the detail, but here the UK has advanced a bold initiative which could be simulated elsewhere. The Chancellor indicated that if the OECD or the G20 can come up with a better plan before 2020, then the UK might ditch this model and go with some international equivalent.
Interestingly, shares in Amazon (NASDAQ:AMZN) dropped by nearly five percent following the Chancellor’s announcement – though that may have reflected more general market sentiment around the US-China trade war. In the hindsight of ten to fifteen years’ time it may seem strange that governments allowed the tech giants to have it all their own way for so long. Sainsbury’s (LON:SBRY) alone pays about £580 in business rates each year. Why couldn’t Amazon be charged with additional business rates on its fulfilment centres?
Sooner or later, somehow, a tech tax is coming. According to eMarketer, the combined advertising revenue of Google, Facebook, Twitter and Snapchat out of the UK is expected to reach £9.2 billion in 2020. Mr Hammond said: “I’m already looking forward to a call from the former leader of the Liberal Democrats”. That was his only quip at which I smiled.
The assumption was that the personal allowance would have to be frozen in order to finance the additional spending pledges. In the event, the Chancellor accelerated the rise in the personal allowance (below which no income tax is paid) to £12,500 next year and raised the threshold for higher rate (40 percent) tax to a more sensible (and more memorable) £50,000. Overall, about 32 million British taxpayers will benefit from this. The move has prompted speculation that the government is preparing for another snap general election next year.
The rise in tax thresholds comes at a moment when – at last – wage rises are outpacing inflation. Wage growth is currently running at 3.1 percent against an inflation rate of 2.4 percent – not a huge margin, it is true. Companies are hiring, inflation is abating and unemployment is at a four decade low. It is therefore appropriate to increase the national living wage at this juncture – though from £7.83 to just £8.21 per hour in April next year is not ambitious enough, in my view. True, these rates are recommended by the Low Pay Commission (LPC), whose current remit is for the national living wage to reach 60 percent of median earnings by 2020. That remit may be revised.
Nor did the Chancellor raid high earners’ pension pots, as many had anticipated.
The fiscal facts
The OBR’s new growth estimates are not a cause for joy, but Britain is growing faster than Japan, Germany and France – despite the postponed investment decisions due to Brexit.
Ahead of the budget we learnt that, since April the government has borrowed £19.9 billion – as compared with £30.6 billion last year thanks to robust tax receipts. That is encouraging – but the downward trend is by no means certain to continue. With the prospect of significant monetary contraction in 2019 – in the UK and globally – global growth and therefore trade could stall next year. Once again, the OBR forecasts are just a snapshot of current guestimates about uncertain future outcomes.
In a little-noted passage in the Red Book, Mr Hammond actually raised the burden of capital gains tax (CGT) by slashing tax relief on capital losses. In the post-Brexit dispensation Britain will be in the fray with aggressively competitive countries which do not have CGT (most of the ASEAN states), nor even inheritance tax (India and Israel). What is clear is that Undertaker Hammond has the mindset of a tax-and-spend Europhile.
Austerity is coming to an end – but discipline will remain
Discipline is an excellent Tory word – but it is a highly equivocal one. Moderate discipline, especially self-discipline, is admirable; a complete lack of discipline is lamentable; but excessive discipline may be associated with autocracy, even cruelty. Just how disciplined does Mr Hammond want Britain to be? The answer is: not very.
In order to finance increased spending he would either have to raise taxes or borrow more. In the event, he chose to borrow more over the longer term, given the wider fiscal headroom permitted by better-than-expected tax receipts. Without Mr Hammond’s new spending commitments the OBR reckons that the UK budget would have been in surplus by 2023. But that radiant day when the budget will finally balance has now been postponed further into the medium to long term of economic Neverland.
Never miss an issue of Master Investor Magazine – sign-up now for free!
In fact, the deficit will be bigger next year than this year. (Spending will be £841 billion and tax receipts £810 billon.) That means that the national debt will continue to rise towards the two trillion pounds figure, even if the critical debt-to-GDP ratio should fall if current growth forecasts turn out to be correct. At this rate of increase, and with the prospect of higher interest rates, the interest cost of the national debt, which already exceeds the transport budget, might one day rival the cost of the NHS. If Labour boxes clever, it will not let the nation forget that.
The financial markets, however, were perfectly happy with a prospective budget deficit of just 0.8 percent of GDP in 2023-24 and a debt-to-GDP ratio of 74.1 percent. The contrast with Italy (whose growth in Q3 was zero) could not be clearer – and gilts actually firmed. The middle classes will be chuffed by the prospect of a cut in income taxes. Small business owners will know that someone feels their pain. Though people on Universal Credit will most likely remain unconvinced for now – and that issue may come back to bite the government. But Labour is now on the back foot: the Tories will seek to frame them as the party of less discipline, more spending and more taxes.
This was a bad day for proponents of small government. Government expenditure as a proportion of GDP is set to remain at about 38 percent – just where it was under Gordon Brown before the financial crisis. And those of us who doubt that the NHS will ever radically improve just by having money thrown at it look on in pain.
Overall, this was, as all budgets are, a deeply political event; but one overshadowed by the fear that the Brexit negotiations may yet end in tears. That, of course, would change everything. As I write, the Institute for Fiscal Studies (IFS) has described the budget as “a gamble”. Well, silly IFS, of course it was! Tell us something we don’tknow.
For political history anoraks (like me) it is of interest that the last Chancellor to deliver a budget on a Monday, Selwyn Lloyd, was sacked three months later in Prime Minister Harold Macmillan’s Night of the Long Knives. The Tories had been in power for eleven years and, having survived the ignominy of the Suez Crisis (1956) they managed to steer the economy into calm waters under Harold Macmillan. (You’ve never had it so good.) But by 1962 they had begun to bore the nation rigid with a cabinet of seven dukes, followed by the premiership of Sir Alec Douglas-Home (14th Earl) who famously looked and sounded like a canary. By 1964 Labour had retaken power under Harold Wilson.
The Chancellor’s one hour and twelve minutes on his feet was marked with enthusiasm on his own side when he sat down. Of course, the backbench troopers had not read the Red Book, but they liked the tone. Austerity’s funeral had been surprisingly tasteful and uplifting: it could almost have been taken from a Richard Curtis film, with Mr Hammond played by Rowan Atkinson. Mrs May looked on like a very mildly bereaved elderly relative, quietly relieved that the obsequies were over. (Surely she would have to be played by Dame Judy.)
But since it’s Halloween I can’t help but share with you the chilling rumours. Tapping and scratching noises have been heard emanating from Austerity’s tomb. Some whisper that she was interred alive. The grisly fear is that Austerity’s decomposing body may have to be exhumed one day not too long from now in a nightmarish epilogue…