While UK Chancellor Philip Hammond repeatedly tried to force home the message that “era of austerity is finally coming to an end” during his Budget speech yesterday, think tank the Resolution Foundation had other ideas.
The Chancellor made his case by saying that 3.3 million more people were now in work than in 2010, and he expected 800,000 more jobs to be created by 2022. Moreover, wage growth was at its highest level for almost a decade.
While the 2018 economic growth forecast may have been downgraded to 1.3% from 1.5% in March due to the impact of the bad Spring weather, the forecast for 2019 had been raised from 1.3% to 1.6%, Hammond said. The same applied to annual forecasts over the next four years, which were expected to come in at 1.4% in 2020, 1.5% in 2021, and 1.6% in 2022 and 2023 respectively.
But while the Foundation acknowledged that borrowing was much lower than expected and economic growth was predicted to be slightly higher over the next two years, austerity could not be said to be over.
Torsten Bell, the Foundation’s director, told the BBC: “The Chancellor was able to negotiate the near impossible task in the Budget of easing austerity, seeing debt fall and avoiding big tax rises thanks to a £74 billion (US$94 billion) fiscal windfall. He chose to spend the vast majority of this on the NHS, income tax cuts and a welcome boost to Universal Credit.”
But he added that while the Budget represented a “seismic shift in the government’s approach to public finances, it spelt an easing rather than an end to austerity – particularly for low and middle income families”.
So, although the Chancellor introduced $55 billion (US$70 billion) of tax cuts and increases in public spending, Bell said it would be the top 10% of households that would profit most, with almost half of any long-term gains going to them. In fact, they would benefit to the sum of about £410 (US$523) per year due to rises in the amount people can earn before they start paying both income tax and the higher rate of tax.
Poor households, on the other hand, will gain only £30 (US$38) per year, and to make matters worse, have yet to feel the impact of many of the welfare cuts announced in 2015, which are still to be rolled out. They include a £1.5 billion (US$1.9 billion) benefits freeze for people in work, which the Foundation believes, will result in low income couples with children being up to £200 (US$255) per year worse off.
Here are some of the other highlights from the Chancellor’s Budget speech:
Wages and personal income tax allowance
The National Living Wage will rise by 4.9% from £7.83 (US$9.98) to £8.21 (US$10.46) per hour from April 2019.
The personal allowance threshold, at which point people start paying income tax at 20%, is to rise from £11,850 (US$15,100) to £12,500 (US$15,928) in April 2019. This higher rate income tax threshold, when people pay income tax at 40%, will rise from £46,350 (US$59,063) to £50,000 (US$63,714). In future, both rates will increase in line with inflation. As tax rates and thresholds are different in Scotland, the Scottish government’s Finance Secretary Derek Mackay will set out his plan for Scottish taxpayers on 12 December.
Significance: The increase in the personal allowance threshold is being introduced a year earlier than the Conservative Party’s manifesto commitment indicated in an attempt to signal that austerity is finally over, as stated by the Prime Minister Theresa May during her party conference speech earlier this month.
IR35
IR35 off-payroll regulations are - as expected given the large amount of revenue raised from introducing them to the public sector - to be phased in across large and medium-sized private sector companies as of April 2020. As happened when rolled out to the public sector, the rules will not be retrospective, which means employers will not be liable for past years of non-compliance and Her Majesty’s Revenue & Customs (HMRC) will also not take action against historic cases of non-compliance – only existing ones.
Significance: Employers have 18 months to prepare for the changes, which will be a relief as many had expected them to come into force from next April. But the move is likely to create an additional tax and compliance burden for organisations, not least because the definition of ‘employed’ and ‘self-employed’ is still unclear. To make matters worse, the size bands to differentiate between small and medium-sized firms were not clarified.
Apprenticeship levy
The amount that small businesses must contribute to training an apprentice will be halved at a so far unspecified point in the future from 10% to 5% of the total cost, as part of a “£695 million (US$887 million) package to support apprenticeships”, according to the Chancellor.
Significance: The move is unlikely to make a big difference to the numbers of apprenticeships on offer as many small firms lack the capacity to take on apprentices anyway.
Benefits
Work allowances under the new consolidated benefit system known as ‘Universal Credit’ are to be increased by £1.7 billion (US$2.17 billion). As a result, some 2.4 million working families are expected to gain by £630 (US$803) per year. An extra $1 billion (US£1.27 billion) will also be made available to help welfare claimants move to the new benefit after widespread reports of hardship during trials.
Significance: The Chancellor insists the controversial new benefit system is “here to stay”.
Tax avoidance and evasion
HMRC has been instructed to collect a further £2 billion (US$2.55 billion) in tax by tackling evasion and avoidance. The aim is to clamp down on value-added tax and directly tax offshore entities that realise intangible property income in low-tax jurisdictions. The tax authority also intends to raise £35 million (US$45 million) by making directors liable for any business taxes owed, a policy that was consulted on earlier this year.
Significance: Tax avoidance is being defined ever more broadly in UK legislation, which means that it is becoming easier to be caught in the net.
Brexit
Everything contained in the autumn Budget was based on the assumption that Britain will obtain a Brexit deal with the European Union (EU). The Chancellor appears to have little appetite for introducing any significant new tax policies until the Brexit negotiations are complete. He talked of a “double deal dividend” for the economy if an agreement with the EU is reached, but also promised to keep his eye on the situation.
Significance: The Chancellor stated that a Spring statement could become a “full fiscal event”, or in other words an emergency Budget, in the event of a no deal scenario and possible recession.
Cath Everett is content editor of GPA.Live.
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While UK Chancellor Philip Hammond repeatedly tried to force home the message that “era of austerity is finally coming to an end” during his Budget speech yesterday, think tank the Resolution Foundation had other ideas.
The Chancellor made his case by saying that 3.3 million more people were now in work than in 2010, and he expected 800,000 more jobs to be created by 2022. Moreover, wage growth was at its highest level for almost a decade.
While the 2018 economic growth forecast may have been downgraded to 1.3% from 1.5% in March due to the impact of the bad Spring weather, the forecast for 2019 had been raised from 1.3% to 1.6%, Hammond said. The same applied to annual forecasts over the next four years, which were expected to come in at 1.4% in 2020, 1.5% in 2021, and 1.6% in 2022 and 2023 respectively.
But while the Foundation acknowledged that borrowing was much lower than expected and economic growth was predicted to be slightly higher over the next two years, austerity could not be said to be over.
Torsten Bell, the Foundation’s director, told the BBC: “The Chancellor was able to negotiate the near impossible task in the Budget of easing austerity, seeing debt fall and avoiding big tax rises thanks to a £74 billion (US$94 billion) fiscal windfall. He chose to spend the vast majority of this on the NHS, income tax cuts and a welcome boost to Universal Credit.”
But he added that while the Budget represented a “seismic shift in the government’s approach to public finances, it spelt an easing rather than an end to austerity – particularly for low and middle income families”.
So, although the Chancellor introduced $55 billion (US$70 billion) of tax cuts and increases in public spending, Bell said it would be the top 10% of households that would profit most, with almost half of any long-term gains going to them. In fact, they would benefit to the sum of about £410 (US$523) per year due to rises in the amount people can earn before they start paying both income tax and the higher rate of tax.
Poor households, on the other hand, will gain only £30 (US$38) per year, and to make matters worse, have yet to feel the impact of many of the welfare cuts announced in 2015, which are still to be rolled out. They include a £1.5 billion (US$1.9 billion) benefits freeze for people in work, which the Foundation believes, will result in low income couples with children being up to £200 (US$255) per year worse off.
Here are some of the other highlights from the Chancellor’s Budget speech:
Wages and personal income tax allowance
The National Living Wage will rise by 4.9% from £7.83 (US$9.98) to £8.21 (US$10.46) per hour from April 2019.
The personal allowance threshold, at which point people start paying income tax at 20%, is to rise from £11,850 (US$15,100) to £12,500 (US$15,928) in April 2019. This higher rate income tax threshold, when people pay income tax at 40%, will rise from £46,350 (US$59,063) to £50,000 (US$63,714). In future, both rates will increase in line with inflation. As tax rates and thresholds are different in Scotland, the Scottish government’s Finance Secretary Derek Mackay will set out his plan for Scottish taxpayers on 12 December.
Significance: The increase in the personal allowance threshold is being introduced a year earlier than the Conservative Party’s manifesto commitment indicated in an attempt to signal that austerity is finally over, as stated by the Prime Minister Theresa May during her party conference speech earlier this month.
IR35
IR35 off-payroll regulations are - as expected given the large amount of revenue raised from introducing them to the public sector - to be phased in across large and medium-sized private sector companies as of April 2020. As happened when rolled out to the public sector, the rules will not be retrospective, which means employers will not be liable for past years of non-compliance and Her Majesty’s Revenue & Customs (HMRC) will also not take action against historic cases of non-compliance – only existing ones.
Significance: Employers have 18 months to prepare for the changes, which will be a relief as many had expected them to come into force from next April. But the move is likely to create an additional tax and compliance burden for organisations, not least because the definition of ‘employed’ and ‘self-employed’ is still unclear. To make matters worse, the size bands to differentiate between small and medium-sized firms were not clarified.
Apprenticeship levy
The amount that small businesses must contribute to training an apprentice will be halved at a so far unspecified point in the future from 10% to 5% of the total cost, as part of a “£695 million (US$887 million) package to support apprenticeships”, according to the Chancellor.
Significance: The move is unlikely to make a big difference to the numbers of apprenticeships on offer as many small firms lack the capacity to take on apprentices anyway.
Benefits
Work allowances under the new consolidated benefit system known as ‘Universal Credit’ are to be increased by £1.7 billion (US$2.17 billion). As a result, some 2.4 million working families are expected to gain by £630 (US$803) per year. An extra $1 billion (US£1.27 billion) will also be made available to help welfare claimants move to the new benefit after widespread reports of hardship during trials.
Significance: The Chancellor insists the controversial new benefit system is “here to stay”.
Tax avoidance and evasion
HMRC has been instructed to collect a further £2 billion (US$2.55 billion) in tax by tackling evasion and avoidance. The aim is to clamp down on value-added tax and directly tax offshore entities that realise intangible property income in low-tax jurisdictions. The tax authority also intends to raise £35 million (US$45 million) by making directors liable for any business taxes owed, a policy that was consulted on earlier this year.
Significance: Tax avoidance is being defined ever more broadly in UK legislation, which means that it is becoming easier to be caught in the net.
Brexit
Everything contained in the autumn Budget was based on the assumption that Britain will obtain a Brexit deal with the European Union (EU). The Chancellor appears to have little appetite for introducing any significant new tax policies until the Brexit negotiations are complete. He talked of a “double deal dividend” for the economy if an agreement with the EU is reached, but also promised to keep his eye on the situation.
Significance: The Chancellor stated that a Spring statement could become a “full fiscal event”, or in other words an emergency Budget, in the event of a no deal scenario and possible recession.
Cath Everett is content editor of GPA.Live.
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