Budget 2018: More joined-up thinking is required

Dr Tony Syme, expert in macroeconomics and international finance at the University of Salford Business School, commented on the budget.

This was supposed to be the budget to signal the end of austerity, and the five per cent increase in the personal tax allowance and eight per cent increase in the Higher Rate Threshold certainly exceed the rate of inflation, so there are reasons to be happy for 32 million taxpayers.

But there are two reasons to wary. First, what about Brexit? Only yesterday, Philip Hammond said that a new Budget would need to be set if there was a no-deal Brexit.

Yet, following the intervention of No. 10 earlier today which dismissed that suggestion, there was hardly a mention of Brexit in today’s Budget speech. The elephant is still firmly in the room. Second, the OBR’s forecast for economic growth to not exceed 1.6% over the next five years means that, for all today’s promises of £30.5bn additional spending over that period, there is a serious problem of how to pay for this in the future. Unless the economy grows sufficiently, any increase in government funds needed to pay for these proposals will not materialise.

Of all the EU countries, only Denmark has a lower growth rate, but it is still forecast to grow faster than the UK over the next few years. Without economic growth, austerity cannot end. Here is the nub of the problem: recent growth within the UK economy has been fuelled by consumer expenditure. The household savings rate is currently 4.4%, but the average since 2000 is eight per cent and across the 1980 and 1990s, it averaged over 11%. There was capacity within household budgets to spend more and so boost the economy.

However, that capacity is almost exhausted now and, despite the tax cuts announced today, the Budget should really have focussed on policies to increase productivity. With higher levels of productivity growth, both Treasury and household incomes can rise and debt be reduced. Without policies to increase productivity, austerity is not going away any time soon.”

Gordon Fletcher, retail expert from the University of Salford Business School, added:

“Hammond tested his stand up comedy routine this afternoon but, in his last budget before Brexit, he is still ‘spreadsheet’ Phil – just a little less austere.

The uncertainty of Brexit meant that few long term spending promises were made that could not be later reversed. Similarly, many of the details that might be expected – and that might be less popular – were deferred to the spending review next year. Despite the confirmation of the continuation of Universal Credit many of the statements felt like a pre-election budget. Money was on offer for the NHS, to fill potholes, to keep beer, cider and spirit excises fixed, support council services and help first time home buyers.

A surprising announcement was the plan to revitalise the high street by converting under-used retail space into new residential properties. The thinking being that the new residents will increase footfall and shop locally.

In a budget that primarily spent money rather than gathering it in, the Digital Services Tax was a notable exception. This exception does make it difficult to spot how the promised increases in spending can all be paid for. In the spirit of the Halloween period, Hammond targeted the FAANG (Facebook, Amazon, Apple, Netflix, Google) companies in a way that he stressed would not be an online VAT. How this tax will not be passed on to consumers is somewhat unclear. The budget also focused on tax avoidance and tackling business services outsourced to off-shore companies.

The budget appeared to lack vision as it gave money out to tick various boxes without recognising the opportunities of linking some of the thinking together. Entrepreneurship, small business, revitalising the high street, reducing waste, improving mental health and improving productivity are not isolated problems that can be fixed with individual increases in funding – as welcome as those injections may be. More joined up thinking is required to bring the budget into the 21st century as Hammond promises.”

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