Chancellor Philip Hammond’s first, and last, Spring Budget was always going to be a low-key affair. At half the length of the usual document – and with a noticeably higher joke-to-announcement ratio than might have been expected from ‘Spreadsheet Phil’ – this Budget contained little by way of tax and spending measures. And the short-term good news on growth and borrowing is tempered by a more complex, and potentially more uncertain, medium-term story.
As for financial markets, investors will be far more interested in two other events this month: a rate rise from the US central bank in mid-March; and the triggering of Article 50. Compared to those, the Budget is small beer.
Economic insight: Short-term gain, long-term constrained
A rare sighting in recent years: some growth and fiscal upgrades... The chancellor was able to unveil a stronger growth forecast from the Office for Budget Responsibility for 2017 and a slight improvement in the public borrowing forecasts. GDP growth is now projected to be 2.0% this year, up from 1.4% in Mr Hammond’s Autumn Statement. Public sector net borrowing is also expected to be £23 billion lower over the next three years than last November.
But the Brexit pain has been delayed, not avoided altogether... The economy is now expected to grow more slowly between 2018 and 2020. Before the Budget, there had been much speculation that the better-than-expected economic performance since the European Union referendum would expand the Chancellor’s Brexit ‘war chest’ – in reality, his headroom to borrow more money while sticking to his fiscal rules, rather than a pot of spare cash – to as much as £60 billion. In the event, the worsening of the medium-term growth outlook has slightly shrunk that headroom, from a forecast £27 billion last autumn to £26 billion today.
A neutral package overall, with some net giveaways in the next two years balanced up by a fiscal tightening thereafter... The Budget measures do, however, loosen the purse strings by a net £2.4 billion over the next two years. An increasingly strained social-care sector is the main beneficiary, while there are also some additional funds for an expansion of free schools. Thereafter, Mr Hammond returns to net fiscal tightening mode, with a net £2.2 billion set to be raised over the three years from 2019. This extra revenue is expected to come from three sources: a lower tax-free dividend allowance, raising around £900 million annually; an increase in national insurance contributions from the self-employed, raising around £600 million; and the remainder from that old favourite, a clampdown on tax avoidance and evasion.
It may not have made for compelling viewing, but there’s little wonder that this was a Budget of few parts... Given his natural caution, all the uncertainties surrounding a Brexit negotiation process that is yet to begin and the small matter of a potentially hefty EU divorce bill, we can’t argue with Mr Hammond’s decision not to dip into his additional fiscal headroom at this early stage. The chancellor did, however, repeat his themes of strengthening the economy, increasing fairness and boosting productivity. We would hope for rather more action – and a lot more detail – in the autumn.
Market insight: Little to see here … Next stop the Fed
This Budget is likely to be received calmly by equity, currency and, perhaps most importantly for the chancellor, debt markets. As a cautious man, Mr Hammond will be happy with that result.
The chancellor reiterated his desire for the UK to be the best place in the world to start and grow a business. Although he did not alter the corporate tax rate, he reminded the House of Commons that it would fall to the lowest level in the G20 in April. This remains helpful to UK corporate earnings. However, there are also considerable expectations among investors that other countries, particularly the United States, may become more active in seeking to compete with these low corporate tax rates.
There were significant changes to the taxation of equity dividends, through a reduction in the dividend allowance to £2000 a year. This was presented as a strategy both to weaken the attractiveness of incorporation and to reduce what the chancellor sees as a generous tax break for investors with substantial share portfolios. The measure will be hotly debated – but, at the margin, it reduces the attractiveness of equities to this group of savers and adds further complexity to the long-term savings market.
The chancellor also addressed what he regards as areas of ‘market failure’, particularly in fast-developing parts of the economy. He has committed to bring forward a green paper on protecting the interests of consumers while taking immediate steps to protect consumers from unexpected fees or unfair clauses; to simplify terms and conditions; and to give consumer bodies greater enforcement powers. These moves may be welcome, but companies affected by them will be keen to see the detail, as well as the intended new powers of these bodies.
Also announced were further plans to assist North Sea oil and gas producers, providing support for the transfer of late-life assets. These steps add to the assistance given previously and will be welcomed by an industry under considerable pressure.
This was a statement delivered in the context of substantial economic, market and geopolitical uncertainty worldwide. The outcomes of events beyond our shores are therefore likely to have more influence on UK markets, in all their forms, than the chancellor’s pronouncements from the dispatch box this afternoon.