Analysis of the 2017 Spring Budget: a young professional’s perspective

15-03-2017

By Nicolas Dicicco, Finance Policy Intern, CIPFA

The Rt Hon Philip Hammond MP, Chancellor of the Exchequer, in his Spring Budget speech revealed that the UK macro economy achieved solid economic results, with GDP growing at the second fastest rate out of any G7 nation in 2016. The country’s growth forecasts for 2017 received upgrades from 1.7% to 2%, and employment rates have shown the highest levels since 2009. 

Moreover, the Chancellor’s budget attempts to build on this growth by continuing the reduction in debt-to-GDP, while “returning public finances to balance” without incurring hefty borrowing costs. Such a statement asserts that his forecasts recognise not only the short-term and medium-term budgetary gaps within certain public services, but also the British economy’s long-term health as Parliament attempts to successfully guide the country through an exit from the European Union.

A more “competitive, fairer” tax system

In response to many pundits, including CIPFA, the Chancellor outlined his goal to fuel additional spending by creating a more “competitive, fairer” tax system. This includes taxation on the digital economy, a tax avoidance crackdown on businesses that attempt to convert capital losses into trading losses, and a drop in the tax free dividend allowance. Moreover, the failed exemption for public bodies from insurance premium taxes (IPT) puts added pressure on future public funding levels as changes in the discount rate increase claim payouts. CIPFA feels it remains to be seen if these moves provide support for restoring public finances or rather counteract progress.

Mr Hammond has had to reverse his decision to increase the national insurance contributions of self-employed employers, following strong criticisms from government and others. His initial decision was viewed by many as reneging on his party’s commitment expressed in the 2015 manifesto. Interestingly though, the Chancellor is very silent on how the government will fund the gap created by his U-turn decision.

The Chancellor also added strategic investments to his plan to stimulate economic growth and sustain the health of public finances. Such investments include funding for 110 new free schools and £216m more investment in the schools estate over the next three years. The number of training hours for technical students aged 16–19 will be increased by 50%, so that they can be "genuinely work ready" upon completion of their studies. By investing in education, Hammond hopes to address the UK’s current ‘brain drain’ and plan for the long-term effects of globalisation and Brexit. This response to some extent supports CIPFA’s recommendations about the need for long-term planning. 

Funding increase for social care

Furthermore, a £3bn increase in funding for social care over the next three years, coupled with other smaller funding plans to improve the NHS, should help reduce the funding gaps within the social care budget. Mr Hammond himself said, “the long-term challenges of sustainably funding care in older age requires a strategic approach”. This isn’t to say that the Chancellor’s budget does not warrant criticism, as it is a short-term fix, but it holds some key positives that can alleviate the acute concerns of many critics.

Following Mr Hammond’s announcement during the 2016 Autumn Statement, this will be the last time that the main Budget will be delivered in spring. Previously there have been two announcements on fiscal changes each year, a Spring Budget and an Autumn Statement (a 'mini-budget'). CIPFA welcomes the move to have a single budget announcement per year.

However, it will be interesting to see how effective this move turns out to be in the long run. Proponents have argued that this shift provides government more time to see through policy, without the effect of short-term fluctuations, while also reducing the complexity surrounding the formulation of the Budget. For this argument to hold true, government officials will have to ensure that they effectively assess their data to inform not only the public sector’s short/medium term economic plans but also the long-term ones. The previous arrangement allowed for interim review of the UK economy to shape the government’s spending decisions.

Performance Tracker

CIPFA and IFG in their recent report, Performance Tracker: A Data-driven Analysis of the Performance of Government, encouraged the Chancellor to go a bit further and develop a systematic approach for assessing service performance that matches spending against the demand, scope and quality of public services. The report recommends that the Chancellor should use the tracker “as a basis for developing and managing improvements over time”.

The Chancellor also highlighted a number of initiatives and tax reliefs designed to stimulate growth, while also encouraging businesses to remain in the UK. However, this has the potential to leave a bigger black hole in the government’s tax receipts and means that the UK’s economic sustainability hinges on the success of a smooth Brexit. The Chancellor’s stance on finding the financial injections within the current budget rather than raising funds elsewhere could be seen as limiting. For example, is there an alternative? Could local government be entrusted with devising innovative ways to raise funds while at the same time ensuring that effective control mechanisms are in place? 

Despite the short-term positives, more long-term action needs to be seen in order to preserve the current state of the UK economy. The road ahead is filled with hidden bumps and unseen turns. Will the Chancellor’s projections hold? Only time will tell.

Summary of announcements

  • The Budget is geared towards harmoniously steering Great Britain out of the EU while ensuring that a platform for a “fairer, global” economy exists.
  • Key macro KPIs show the UK’s recent surprise economic prosperity, despite uncertainty from Brexit.
  • Annual forecasts show decreases in net public borrowing for future years as Hammond attempts to maintain focus on reducing national debt and revitalising public finances.
  • The Budget includes relief funds and breaks for businesses affected by future rate hikes in addition to lockdowns on tax avoidance and evasion that fund additional spending.
  • There is massive investment in education in the hope of diminishing the current skills shortage and producing more home-grown talent for the UK workforce.
  • Additional funding is being given to social care and triage programmes for English hospitals.