Why we should worry about the Budget

Why we should worry about the Budget

So that was the 2017 Budget.

One a year would be quite enough, but yesterday saw the second official Budget this year. The main event has now been switched from March to November while the Autumn Statement has moved to the spring.

It’s like the UK has imposed some sort of masochistic punishment upon itself for daring to vote Leave in the EU referendum.

As ever, the Chancellor of the Exchequer announced a variety of new measures.

I’ll not dwell on most of these here as you’ve probably seen the details.

Today I want to look at the worrying bit of the Budget…

It’s different this time

Budgets and Financial Statements are normally quite similar.

Despite all the hype, lobbying and headline-grabbing gimmicks, there’s generally nothing much to see on the day. The biggest changes are carefully leaked beforehand, thus preventing nasty surprises.

2017’s November version, though, is different in one way. Since 1973, all Britain’s Budgets have been delivered against the backdrop of our EU membership.

While we’re still technically in the single market, those days are numbered.

And over the next two years the Chancellor is setting aside £3bn for Brexit contingency planning.

To be honest, that’s no big deal. Let’s move on.

Let’s also sidestep the likes of personal tax changes, tobacco duty increases and Scotland’s police/fire services’ VAT refunds from April 2018, etc, etc.

They all matter. But they’re not my focus today. That’s the bigger picture.

Nowadays the Budget’s macro-economic numbers are crunched not by Treasury civil servants but by the independent Office for Budget Responsibility (OBR).

Government get out clause?

As a result, the government has someone to blame if the forecasts turn out wrong. Trouble is that these OBR stats can curtail the Chancellor’s freedom of fiscal movement.

And the day before the Budget, Philip ‘Spreadsheet’ Hammond got a nasty surprise.

UK government borrowing on a measure called the PSNB (Public Sector Net Borrowing) excluding public sector banks was £8bn in October, which was above the consensus expectation of £7bn and £0.5bn higher than last year’s outturn.

That’s enough to cause the Chancellor a bad headache. But before reaching for the painkillers, he did have something to cheer about…

Earlier months’ low borrowing means that the current fiscal year’s borrowing total is almost 10% lower than last year. That compares with the 13% borrowing increase expected for the full year by the OBR’s March forecast.

The path ahead isn’t as promising, though. The OBR has cut its forecasts for future productivity and GDP growth, with the latter being reduced by a cumulative 2% over the next five years. Lower growth results in fewer tax receipts. In turn, this means less money to spend (or higher government borrowing).

Yet Mr Hammond has still produced a more generous Budget than expected. The so-called ‘fiscal giveaway’ (which of course is nothing of the sort – it’s just less being taken from taxpayers) comes to almost £10bn on an annualised basis in 2019-2020.

What’s more, the Chancellor maintains that he’ll hit his target of reducing the structural budget deficit (which excludes the cyclical elements) to 2% of GDP by 2020-21, albeit with a reduced margin of around £15bn.

o that was the 2017 Budget.

One a year would be quite enough, but yesterday saw the second official Budget this year. The main event has now been switched from March to November while the Autumn Statement has moved to the spring.

It’s like the UK has imposed some sort of masochistic punishment upon itself for daring to vote Leave in the EU referendum.

As ever, the Chancellor of the Exchequer announced a variety of new measures.

I’ll not dwell on most of these here as you’ve probably seen the details.

Today I want to look at the worrying bit of the Budget…

It’s different this time

Budgets and Financial Statements are normally quite similar.

Despite all the hype, lobbying and headline-grabbing gimmicks, there’s generally nothing much to see on the day. The biggest changes are carefully leaked beforehand, thus preventing nasty surprises.

2017’s November version, though, is different in one way. Since 1973, all Britain’s Budgets have been delivered against the backdrop of our EU membership.

While we’re still technically in the single market, those days are numbered.

And over the next two years the Chancellor is setting aside £3bn for Brexit contingency planning.

To be honest, that’s no big deal. Let’s move on.

Let’s also sidestep the likes of personal tax changes, tobacco duty increases and Scotland’s police/fire services’ VAT refunds from April 2018, etc, etc.

They all matter. But they’re not my focus today. That’s the bigger picture.

Nowadays the Budget’s macro-economic numbers are crunched not by Treasury civil servants but by the independent Office for Budget Responsibility (OBR).

Government get out clause?

As a result, the government has someone to blame if the forecasts turn out wrong. Trouble is that these OBR stats can curtail the Chancellor’s freedom of fiscal movement.

And the day before the Budget, Philip ‘Spreadsheet’ Hammond got a nasty surprise.

UK government borrowing on a measure called the PSNB (Public Sector Net Borrowing) excluding public sector banks was £8bn in October, which was above the consensus expectation of £7bn and £0.5bn higher than last year’s outturn.

That’s enough to cause the Chancellor a bad headache. But before reaching for the painkillers, he did have something to cheer about…

Earlier months’ low borrowing means that the current fiscal year’s borrowing total is almost 10% lower than last year. That compares with the 13% borrowing increase expected for the full year by the OBR’s March forecast.

The path ahead isn’t as promising, though. The OBR has cut its forecasts for future productivity and GDP growth, with the latter being reduced by a cumulative 2% over the next five years. Lower growth results in fewer tax receipts. In turn, this means less money to spend (or higher government borrowing).

Yet Mr Hammond has still produced a more generous Budget than expected. The so-called ‘fiscal giveaway’ (which of course is nothing of the sort – it’s just less being taken from taxpayers) comes to almost £10bn on an annualised basis in 2019-2020.

What’s more, the Chancellor maintains that he’ll hit his target of reducing the structural budget deficit (which excludes the cyclical elements) to 2% of GDP by 2020-21, albeit with a reduced margin of around £15bn.

Smoke and mirrors? Sort of…

Reclassifying housing associations from the public to the private sector cuts PSNB by a total of £24bn over the next five years. Further, sizeable sums are being targeted from new anti-tax avoidance and evasion measures. I hope Mr H has been reading the Paradise Papers. However the numbers are calculated, though, the net effect will be reduced austerity in future years.

Thus far, then, Brexit has made little difference to the state’s coffers, and anyway, if you’re a regular DR reader you’ll know we don’t set too much store by official forecasts.

Maybe the OBR is now too bearish about the immediate prospects for UK growth. If this comes in better than expected, raising tax revenues on the way, the Tories might be able to build a war chest for the next election after all.

Both the pound and the gilt market took yesterday’s announcements in their stride. In short, then, there’s nothing obvious in the Budget to prompt us to panic.

Or is there?

Making housing problems worse

There’s one Budget measure that could be storing up trouble ahead.

Increasing inter-generational inequality, people in their 20s and 30s owning less wealth than their parents is a major issue these days. The number of homeowners under the age of 45 fell to 3.56m in 2015 from 4.46m in 2010.

In the last election, this decline clearly didn’t do the Tories any favours.

The Prime Minister had already promised another £10bn to expand the Help to Buy Scheme that helps first-time buyers (FTBs) obtain a mortgage with just a 5% deposit.

Now – as part of a longer-term trend – the Chancellor has abolished stamp duty for FTBs purchasing properties worth up to £300,000. Apparently 95% of all FTBs will benefit, with 80% paying no stamp duty at all.

The problem with this, as Samuel Tombs at Pantheon Macroeconomics points out, is that past stamp duty reforms have rarely been successful in boosting housing transactions. And they haven’t stemmed that decline in home ownership among the young, though they have helped to boost prices.

The best way to help FTBs is build more houses. While the Chancellor reconfirmed the government’s aim of raising the country’s housing stock by 300,000 homes a year by the mid 2020’s, “his strategy for achieving that seems to depend largely on extending the Government’s patchwork approach to the sector with more funding, hoping this will allow housebuilding to pick up gradually over time”, saysEd Stansfield at Capital Economics.

“Any hopes that the Chancellor would come up with a new and innovative approach to boosting the UK’s housing supply in today’s Budget were soundly disappointed”.

I recently wrote in DR about rising risks in Britain’s housing market. Cuts in stamp duty could well push FTBs into borrowing even more money to ‘get on the ladder’. The resultant debt growth would mean this section of the Budget doing more harm than good – in particular if another financial crisis occurs.

Now that wouldn’t just be just about Britain. We’re talking a possible global meltdown. That’s something the Chancellor was never going to suggest yesterday. Yet you need to be aware of the consequences and how to protect your portfolio.

We reckon we’ve found a way. Agora’s gold expert (there’s a clue!) Simon Popple will give you the full details soon. Keep watching your inbox…