Spring Budget 2017: “No room for complacency”
The first – and last – Spring Budget of Chancellor of the Exchequer Philip Hammond proved rather more controversial than the Government might have liked. News of a stronger-than-expected economy, alongside further investment in education, training, and social care, was overshadowed by a surprise move to increase Class 4 National Insurance contributions (NICs) for the self-employed.
Short-term upgrade for economic growth
UK economic growth has been better than expected. The UK was the second-fastest-growing G7 economy during 2016, surpassed only by Germany. Unemployment has continued to fall and employment has grown to record levels. Nevertheless, although employment has risen, productivity remains “stubbornly low”
Economic growth is expected to pick up in the short term before softening slightly. The Office for Budget Responsibility (OBR) upgraded its forecast for UK economic expansion in 2017-18 from 1.4% to 2%, after which growth is expected to slow. The OBR downgraded its growth forecast from 1.7% to 1.6% in 2018-19, from 2.1% to 1.7% in 2019-20, and from 2.1% to 1.9% in 2020-21, after which growth is expected to pick up to 2%. The UK’s rate of inflation is predicted to reach 2.4% in 2017, subsiding to 2.3% in 2018-19 and to 2% in 2019-20.
"The National Living Wage will rise from £7.20 per hour to £7.50 per hour."
The OBR expects public borrowing to be lower than previously expected, following unexpectedly resilient economic performance in the wake of the Brexit vote. Public borrowing for 2016-17 is forecast to be £51.7 billion, compared with an earlier forecast of over £68 billion. Looking further ahead, borrowing is expected to reach £58.3 billion in 2017-18, £40.8 billion in 2018-19, £21.4 billion in 2019-20, £20.6 billion in 2020-21, and £16.8 billion in 2021-22.
Public sector net borrowing as a percentage of GDP is predicted to fall from 3.8% last year to 2.6% this year, before rising to 2.9% in 2017-18 and then subsiding to 1.9% in 2018-19, 1% in 2019-20, 0.9% in 2020-21, and 0.7% in 2021-22.
Debt is forecast to rise to 86.6% this year and then to peak at 88.8% next year, compared with an earlier forecast of 90.2% . Debt is then expected to decline until it reaches 79.8% in 2021-22.
The National Living Wage will rise from £7.20 per hour to £7.50 per hour, to take effect in April 2017. National Insurance thresholds for employees and employers are to be aligned at £157 per week. The taper rate for Universal Credit will be reduced from 65% to 63% from April 2017.
Support for businesses
£435 million has been set aside for businesses that have been affected by the revaluation of business rates . Local authorities will receive a discretionary fund totalling £300 million for small businesses that have been hardest hit by the changes. Pubs with a rateable value of less than £100,000 will receive a discount of £1,000. Any business losing small business rate relief will not pay more than £50 per month extra
The Confederation of British Industry (CBI) welcomed the Chancellor’s recognition of the challenges posed by business rates, but criticised the lack of “any immediate prospect of more frequent valuations, or broader relief from rising business rates in a world of higher inflation”. Similarly, whilst welcoming “short-term support” for businesses affected by the revaluation, the British Chambers of Commerce (BCC) warned that, “However welcome, measures that mitigate the short-term impact of business rate rises are little more than a sticking plaster.”
"Class 4 NICs will rise from 9% to 10% in April 2018, and to 11% in April 2019."
The introduction of quarterly reporting of accounts for businesses with turnover below the VAT threshold will be delayed by one year.
Mr Hammond also revealed a crackdown on tax avoidance that is intended to raise an additional £820 million. The measures are designed to prevent businesses from converting capital losses into trading losses, addressing the abuse of foreign pension schemes and introducing VAT on roaming telecoms services outside the EU.
Shock rise in Class 4 NICs
The Chancellor sparked controversy by unveiling an increase to Class 4 NICs , which are paid by the self-employed. Class 4 NICs will rise from 9% to 10% in April 2018, and to 11% in April 2019. This was a particularly contentious move because the Conservative Party manifesto for the 2015 General Election had included a pledge not to increase NICs. The Federation of Small Businesses (FSB) reacted strongly to the decision, describing it as a “tax grab on middle income self-employed people who are just about managing”. Meanwhile, the CBI commented that, while it understood the decision to reduce the difference between employee and self-employed NICs, the Government must continue to incentivise entrepreneurship.
Cut to the tax-free dividend allowance cut
The tax-free dividend allowance for shareholders was cut from £5,000 to £2,000 from April 2018. According to the Chancellor, around half the people who will be affected by this measure are directors or shareholders of private companies; the rest are investors with shareholdings that are typically worth over £50,000 and are held outside ISAs. The BCC warned that increases to dividend taxation and NICs for the self-employed will be not be welcomed by entrepreneurs.
New NS&I savings bond
The Chancellor confirmed the introduction of a new National Savings & Investments (NS&I) bond that will pay interest of 2.2% on deposits up to £3,000. The bond was announced at the Autumn Statement and will be available from April. However, as inflation is forecast to reach 2.4% this year and 2.3% next year, the bond’s attractions might seem a little muted at this stage.
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