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Budget 2018

October 2018

Chancellor Phillip Hammond has delivered the final scheduled Budget before the UK expects to exit the EU in March 2019. In what was a significant change of direction for the current Conservative Party, Hammond promised a “brighter future” for those that have felt the pinch over the last 8 years.

Headline figures

The Chancellor was faced with a significant challenge after the Prime Minister announced the end of austerity in her party conference speech, however the Office for Budget Responsibility (OBR) figures have helped Hammond immensely.

OBR and Barclays GDP forecasts

2018 2019 2020 2021 2022
OBR Barclays OBR Barclays OBR OBR OBR
1.3% 1.3% 1.6% 1.3% 1.4% 1.4% 1.5%

With borrowing forecasts better than expected earlier in the year, Hammond has been able to capitalise on the higher than expected revenues used to increase spending, not run a surplus.

While this will be welcomed by MPs and the public alike, the OBR have issued a sharp warning that the Government has already spent its fiscal windfall, leaving the medium-tern outlook for Government borrowing little changed since March.

The OBR has upgraded its forecast for GDP growth in 2019 from 1.3% to 1.6%, but this remains largely unchanged in the longer term, with growth expected to remain well below its long-run average throughout the forecast period.

Borrowing for this year will be £11.6bn lower than forecast at the Spring Statement and is set to keep falling over the next five years. Overall, the fiscal outlook is healthier than expected, but UK growth remains unbalanced.

Deal or no-deal?

Hammond has also increased funding for Government departments in their preparations for a ‘no deal’ Brexit scenario, up to £2bn from the £1.5bn allocated in the last Autumn Budget. However, Hammond has also claimed that if the Government gets a Brexit deal it will harvest a double “Deal Dividend”, causing a boost from the end of uncertainty as well as a boost from releasing some of the fiscal headroom the Chancellor continues to hold in reserve.

In addition to this, Hammond has clarified that if the economic or fiscal outlook changes materially over the next six months (reading between the lines, as a result of a no deal Brexit), he will take whatever action is necessary including upgrading the Spring Statement to a full fiscal event.

In many respects, he is making a political point to parliamentarians considering voting down any deal the Prime Minister can bring back to the UK: risk no deal and you will lose out.

National Living wage and minimum wage

The National Living Wage applies to all those over 25, while the minimum wage applies for workers aged 24 and under.

Following recommendations from the independent Low Pay Commission, the Government will increase the National Living Wage by 4.9% from £7.83 to £8.21 from April 2019.

From April 2019

National Living Wage National Minimum Wages
25 and over 21 to 24 18 to 20 Under 18 Apprentice
£8.21 £7.70 £6.15 £4.35 £3.90

Current

National Living Wage National Minimum Wages
25 and over 21 to 24 18 to 20 Under 18 Apprentice
£7.83 £7.38 £5.90 £4.20 £3.70

(Source: HM Treasury)

An end to austerity?

Pledging that the “era of austerity is finally coming to an end”, the Chancellor announced £30bn of new Government spending paid for by tax increases, improved public finances and more borrowing.

The spending announced included extra money for schools, the NHS, defence, councils, high streets and roads, as well as almost £3bn to bail out Universal Credit, which is causing the Government a lot of political headaches at the moment.

In addition, planned income tax cuts were brought forward to take place a year early. The personal allowance will rise to £12,500 a year and the higher rate threshold to £50,000 in April 2019, worth £130 a year for a typical base rate taxpayer.

As expected, Jeremy Corbyn’s response to the Budget was to say that “austerity is not over”. While Hammond’s Budget has landed largely well with the public, the real test will be whether households see the benefits, either through an increase to disposable income or through improvement to services and how this trickles through to consumer confidence.

Discounts for the High Street, taxes for the internet

The headline-grabbing announcement of the Budget is the new UK Digital Services Tax: a 2% tax rate on the sales of specific tech giants in the UK. This will only be paid by companies that are profitable and generate at least £500 million in revenues a year, following criticism towards companies such as Amazon and Facebook for the amount of tax they pay in the UK.

While Hammond has emphasised that start-ups will be protected from the levy, TechUK have raised concern that the proposed threshold is too low and could capture smaller companies than anticipated.

Government will consult on the detail of the new tax, with changes coming into effect in April 2020.

Both the 36-member Organisation for Economic Co-operation and Development (OECD) and the European Commission have been trying to reach a consensus on imposing a digital tax on social media platforms, internet marketplaces and search engines.

Hammond has said that if an international solution is reached, the UK might adopt this instead of this UK tax, however the UK’s impatience in moving forwards with its own solution shows its frustration with the lack of progress and unity at international level and the pressure to reach a resolution more quickly. 

Beyond this, small businesses will welcome the announcement that for the next two years, Government will cut the business rates bill of retailers in England with a rateable value of £51,000 or less by one-third. This is in recognition that, while the Government is promising adjustment to rateable values to reflect changes in rental values at the next revaluation in 2021, businesses need help now.

Business investment

Also for smaller businesses, the Chancellor announced a cut to the cost of apprentices, while confirming that larger businesses will be able to spend up to 25% of their apprenticeship levy funds through suppliers – this comes ahead of the fuller review the Government will take of the long-term operation of the levy.

Measures for business investment include an extension of funding for start-up loans and an increase to the Annual Investment Allowance from £200,000 to £1m for two years from January 2019. Meanwhile, the Chancellor maintained the status quo for investors in UK business: further cuts to the dividend tax allowance did not emerge and venture capital trusts and enterprise investment schemes were left alone.

IR35: employers’ responsibility

The Chancellor also confirmed^ that larger businesses will become responsible for assessing an individual’s employment status with respect to IR35 rules.

IR35 rules target so-called “hidden employment” where a contractor is employed through a limited company; the changes introduced from April 2020 will mean employers become responsible for checking whether the IR35 rules apply, and if so the employer will be responsible for deducting income tax and paying employer NICs.

This is already in place for the public sector.

Hammond’s Autumn Budget is in some senses a holding Budget. The Government is due to undertake a full spending review next year, and with the outcome of Brexit still unknown, the OBR forecasts could significantly change and the Government may have to change tact.

But with rates freezes to fuel and beer, less income tax due from April, and an injection of capital into public services, many will be hoping that this Brexit Budget is a pre-Brexit boost for consumer confidence and the wider economy.

For more analysis, listen to our Budget review podcast here, or search for ‘Barclays Corporate Insights’ in your podcast app of choice.