Opinion | Tuesday, 30th October 2018

Budget 2018: University experts respond

Academics share their reactions to Philip Hammond's third budget as the UK’s Chancellor of the Exchequer

The Chancellor of the Exchequer delivered the Budget at Westminster on October 29
The Chancellor of the Exchequer delivered the Budget at Westminster on October 29

Originally published on The Conversation

By Dr Craig Berry, Reader in Political Economy at Manchester Metropolitan University

Austerity has attained a rarefied status in British political discourse. Like “equality” and “freedom”, it now seems to mean whatever the person uttering it wants it to mean. Theresa May has never liked austerity, although she has never really explained why. And now she declares austerity over, not because it actually is over, but rather to signal her distance from the George Osborne era, replicated so faithfully until now by chancellor Philip Hammond.

So, is austerity over? Did it ever really begin? There has never been any serious attempt to raise taxes (other than VAT); although economics textbooks define austerity as cutting spending and raising tax.

In this budget, Hammond announced major tax reductions: cutting business rates for local retailers, and accelerating planned reductions in income tax (predominantly benefiting the already affluent, at a cost of £2.8 billion in 2019-20). He opined that all of the hard work is finally paying off. Yet individual and business taxes have not actually been rising, so the hard work has not really been done in any material sense – only ideologically.

And the specific cut to business rates offers a depressing echo of Osborne’s austerity, which targeted local government for drastic cuts while central government departmental spending was largely spared. Osborne began the process of localising the management of business rate revenues, partly in compensation for severe cuts in grants for local services – so any centrally-mandated cut in business rates could further hit many local authority balance sheets.

As for spending cuts, the question of how large public spending (and therefore public borrowing) should be is a largely frivolous issue now. Whereas May wants to signal the end of austerity to make us all feel better about her premiership, Hammond is only pretending that today’s budget has anything at all to do with the slippery notion of austerity.

For “Spreadsheet Phil”, the cold, hard fact of an impending Brexit is all that matters. Helped by slightly higher tax receipt forecasts, he is relaxing some of the most drastic of Osborne’s backloaded cuts, most obviously by increasing work allowances in Universal Credit (in other words, the point at which benefits are withdrawn). He is largely delivering on May’s promises on health spending, and sprinkled the budget with some relatively low-cost initiatives such as more money for fixing potholes, more support for industrial R&D and infrastructure, and some cash for the “little extras” in schools.

This is not an expansive agenda, but rather one designed to help May to stay in post just long enough to get some sort of Brexit deal. At the same time, he is persevering with the cuts, for the most part, because the risk of “no deal” – and therefore fiscal calamity – remains high.

The UK’s economic slump has reached the point where even the most austere of chancellors would traditionally have been hitting the stimulus button, therefore actually ending austerity – the growth forecasts are, frankly, abysmal. But Hammond knows there is little point in acting until we know what the Brexit deals looks like.

The UK economy’s capacity to actually capitalise on (or multiply) any stimulus will be much diminished if “no deal” stymies domestic investment even further.

Theresa May pledged to end austerity in her 2018 party conference speech (Source: EPA/Neil Hall)

Dr Chris O’Leary, Senior Lecturer and Deputy Director of the Policy Evaluation and Research Unit, spoke to the Financial Times (£) about the Chancellor’s decision to fund the Universal Credit scheme by an extra £1bn.

Dr O’Leary is an expert in public and social policy and welfare reform, and welcomed the increase in the work allowance and increase in the national living wage in the Budget address. However, he was critical of the Chancellor failing to address the implementation problems with Universal Credit which has led to delays in recipients receiving their first payment.

Christian Spence is a Reader in Economic Analytics and part of Manchester Metropolitan's Future Economies Research Centre.

The Chancellor announced an end to austerity and the windfall in the government’s accounts coming from higher than expected tax receipts was almost entirely allocated straight to the NHS. But what of other departments? Protected areas of spending, like defence or international aid, will continue to see funding to maintain their share of GDP and there’s an additional £500m to help no-deal planning within the Department for Exiting the EU.

But apart from that, departmental spending will be restrained over the coming period. The windfall of apples to the NHS aside, there’s not much fruit left to share around other parts of government.

Philip Hammond announced a suite of tax changes, from increasing the personal allowance for both basic and higher rate tax payers, beating the Conservative party’s manifesto to bring in levels of £12,500 and £50,000 for these by one year.

The public also saw freezes in fuel and alcohol duties (but not wine), and additional funding into supporting the roll out of universal credit including a support for transition and a £1,000 increase in the amount you can earn whilst still receiving the support.

Business rates changes see 100% relief on public lavatories and a third off retail, restaurants and cafes bills for those whose rateable value is under £51,000.

Whilst there are definitely some winners from the Budget, austerity is not over yet.

Business also sees a temporary increase in the annual investment allowance to £1m per year for the next years and a new - and welcome - capital allowance for buildings and structures. Off-payroll working reforms already in place in the public sector now apply to medium and large-sized enterprises in the private sector and seek to capture the loss of tax and NI on these earnings if paid through a personal services company.

Small businesses get to keep their £3,000 per year employment allowance - an exemption on employer national insurance (NI) contributions - but businesses with a NI bill of more than £100,000 per year will lose this. Small companies also see the VAT threshold frozen for the next two years, a likely step to show that Treasury is still thinking about reducing this level in the future.

Perhaps the largest measure, however, was a move to tax the turnover of digital companies, aimed at the likes of Amazon and Google. It will likely receive public support, but there will be challenges in its introduction and design, particularly around definitions.

The developed countries of the world are trying to agree a way forward to look at this issue together, as in a globally-connected world where companies are mobile, it can be difficult for a single country to act unilaterally. But Hammond has moved and he may gain some standing for trying to tackle this issue. However it’s not clear to me that a turnover tax is the right way to go about doing this.

Overall it’s a Budget with lots of announcements, money for the NHS and universal credit, some relief for small businesses, but an attempt to raise some cash from the larger ones. Most people will benefit from the changes to personal allowances, but the richest will benefit the most. That, combined with some downward pressure on spending outside of health, defence and international aid means that, whilst there are definitely some winners from the Budget, austerity is not yet over.

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