Philip Hammond’s so-far-short tenure as chancellor will come under the spotlight this week when he spells out his budget plans for the rest of the parliament and sets a course towards a Britain cut loose from Brussels. The uncertainty created by the Brexit vote has left the public finances with a looming black hole that could mean the Treasury borrowing more than £100bn over the life of the parliament.
But a loosening of the purse strings in Hammond’s autumn statement is still possible. The economy is in a robust state and a little extra spending will not prevent him from closing the deficit – the gap between government income and expenditure each year. He could grab the opportunity to bury the legacy of his predecessor George Osborne, or play it safe and do little more than ease planned cuts for poorer families and repair some potholes. We’ve asked expert, campaigners and industry representatives what they think should feature in Wednesday’s statement.
The economist
Martin Beck EY Item Club forecasting group
Hammond has an opportunity, according to Beck, to put George Osborne’s six years of “tricks and fiddles” behind him and set a course towards fiscal stability, rather than an arbitrary balanced budget target, where income and spending are perfectly aligned. “There is no pressing need to launch a huge stimulus package, because the economy has shown much more resilience than the Treasury expected,” he says. “But, that said, the economy is due to slow down, and there is no reason not to alleviate the worst effects on those who are ‘just about managing’.”
Working-age benefits are due to be frozen from next April for the rest of the parliament. The chancellor should consider a two- or three-year delay to help low- and middle-income families. Beck adds: “Not only will they be the worst-affected by rising inflation, but will also spend the money, boosting economic growth.”
Beck, senior economic adviser to the EY Item Club forecasting group, says Hammond should take public investment spending back up to 2% of GDP, at a cost of £6bn. The chancellor should also claw some money back by halting a planned cut in corporation tax – already the lowest among major economies – from 20% to 17%. Firms likely to be hit by Brexit could be offered tax breaks for investment spending. He agrees with business lobby group the CBI that an investment allowance for small and medium-sized businesses – so they pay no tax on investments worth up to £200,000 – should be raised to £1m for a couple of years. Banks should also be encouraged to stay in London with a cut in the corporation tax supplement, currently 8%, and the bank levy.
The thinktank
Matthew Whittaker, chief economist at Resolution Foundation
Hammond said soon after taking up his post that he would scrap George Osborne’s fiscal rule, which committed the government to a balanced budget by 2020. His replacement is expected to be unveiled this week. Whittaker says the chancellor needs to establish a new rule based on bringing down the government’s annual expenditure, while sparing investment spending – such as that on roads, rail and energy.
“Given where we are with low productivity, there needs to be a way for him to boost investment,” he says. The government’s annual outlay is largely composed of departmental spending and transfers to the public, mostly in welfare payments, Whittaker adds. Trimming that expenditure and protecting investment spending will ensure that £17m remains available for long-term projects over this parliament.
Next, Hammond should cancel further income tax giveaways, including raising the personal tax threshold to £12,500 and the higher-rate threshold to £50,000, saving him £2bn by 2020.
Like Beck, Whittaker would cancel the corporation tax cut, scrap freezes on in-work welfare benefits, and leave unchanged the amount people can earn before they begin to lose the new universal credit benefit. The Treasury plans further cuts to the pay levels by which universal credit is calculated, after reducing them in April this year.
Housing is another area that needs attention. The biggest squeeze in recent years on disposable incomes has been rising housing costs, says Whittaker. Instead of offering tax incentives to housebuilders, the government should simply commission them to build, and intervene directly in the development of land for the benefit of local communities, he says.
The manufacturing analyst
Lee Hopley, chief economist at the EEF, the manufacturers’ association
No need for fireworks or fiscal bazookas in the autumn statement, says Hopley. Not unless the economic situation worsens next year. In the meantime lots of practical measures could be brought in to support manufacturers, including abolishing the immigration skills charge – a pre-referendum measure that will slap a £1,000-a-year bill on employers for every migrant worker they give a job to from next April. Small firms and charities were told to pay £364 a year for each job. This was expected to raise £240m for government training schemes. Hopley says the apprenticeship levy, which will raise £3bn, has superseded the immigration charge.
Hopley urges Hammond to expand the road investment strategy – a fund to improve local roads. She points out that employers struggle when heavy traffic on poor roads means staff are late for work and goods are delayed.
She also proposes a unit to promote tech investment. It should, she says, be funded without the usual demand that it create jobs – which would allow it to invest without restrictions.
The retail industry
Bryan Johnston of the British Retail Consortium (BRC)
Business rates are one of retailers’ biggest costs. An adjustment of rateable values – based on property prices – will take effect next April and will increase average bills, especially in London and the south-east. The Treasury has limited the impact in the first year, but it plans to increase bills each year in line with the retail prices index (RPI). Johnston wants this scrapped in favour of the lower consumer prices index (CPI), which is not due to replace RPI until 2020.
Johnston says retailers are keen to understand the complex plans to devolve business rates revenue to councils. At the moment, local authorities are encouraged to offer discounts to help regenerate their town centres, and can keep 50% of the money that generates. Reforms proposed by Osborne will bring that to 100%. But few councils have taken advantage of what they see as a race to the bottom. Johnston wants Hammond to reform the system so that councils can offer discounts without compensation for lost tax revenues, especially since public spending cuts reduced funds for vital local services.
Retailers have also been hit hard by the “national living wage” (NLW), which pushed up the minimum hourly pay for over-24s from £6.70 to £7.20. Johnston says BRC members want Hammond to pledge that future rises be left to the independent Low Pay Commission to implement. The commission is due to report in the next few weeks on plans to evaluate the impact of annual increases in the NLW, and avoid political interference.
The younger generation
Georgia Rigg, Reclaim charity, Manchester
Reclaim aims to give working-class children leadership skills so they can compete with peers from wealthier backgrounds. Rigg says the cost of student loans means asking “young people and their families to walk blindly into tens of thousands of pounds of debt when that is culturally taboo”.
She says: “The scrapping of maintenance grants and the proposed increase in tuition fees for teacher training will have an adverse effect on the poorest students and further damage social mobility. Our latest report, Educating All, shows that financial stress can be a factor in mental health problems and trigger additional wellbeing needs.”
Hammond also needs to go further than just funding apprenticeships. “We need to be looking at which young people are being employed and where. How many working-class young people are recruited into top companies? Numerous reports indicate that the class ceiling is alive and well, with some employers using a ‘poshness’ test when recruiting, favouring well-travelled individuals with ‘well-spoken’ accents. How will the government tackle the invisible barriers that working-class young people face when seeking employment?”
The anti-poverty charity
Peter Tutton, head of policy at Stepchange
Formerly the Consumer Credit Counselling Service, Stepchange is a national charity that has advised more than two million people with debt problems over the past 20 years. Tutton says seven out of 10 people who call for help are in work, but have suffered an income shock. “We are worried about changes to tax credits from April that limit child benefit to two children.”
Like Beck at the EY Item Club, he wants freezes on tax credits and the new universal credit to be lifted. Capping child benefit at two children from April 2017 will also prove disastrous, he says. “About 17% of clients with more than two children cannot make ends meet, even when we’ve helped them with their debts. We estimate that figure will shoot up to 90% after April, when they will lose on average £300 a month.”
This loss of income will come on top of extra costs from rising inflation. “When inflation is rising more than wages,” he says, “safety nets just have to work.” The chancellor can also help indebted people by offering them cheaper credit. “The government offers mortgage buyers cheaper credit through Help to Buy; why not people who are in an often temporary financial hole that becomes permanent when they are forced to use high-priced credit to pay off previous loans?”
The pensions expert
Ros Altmann, former pensions minister
Pensioner incomes have risen sharply in the past 15 years, and fared particularly well after the 2008 crash. But now it is time to end the triple-lock policy that has guaranteed the UK’s 12 million over-65s a 2.5% annual rise if inflation or earnings are lower, says Altmann. Dropping that guaranteed increase would free funds for care of the elderly, which she says is bringing the health service to its knees and threatening to become a 21st-century scandal.
Altmann says the first strategy note she wrote as pensions minister called for the integration of the health and social care systems to cope with the growing scandal of elderly care: “It is going to cost billions to cope with the rising cost of looking after the baby boomer generation, and the chancellor needs to offer tax breaks to better-off taxpayers so they can save for their own care.”
If those who can save are not encouraged to put funds aside, they will find themselves selling their home to pay for their care. The government could allow savers to put as much as £50,000 in a pot ring-fenced for care. These policies could be aimed at families, and their use could be encouraged by structuring the pots to avoid inheritance tax. “We must change the way people think about this. Governments have ignored it for too long.”
