The Budget

Before considering the issues facing the Chancellor and the measures he announced yesterday, it worth reflecting on how the UK economy has altered since 2007. A casual glance suggests little has changed. In 2007 GDP was forecast to grow at 2.5%, unemployment was 5.5%, inflation was 2.3% and  the PSBR was 2.4% of GDP.  Today, GDP is predicted to grow at 2%, unemployment is 4.8%, inflation rose to 1.8% in January and the PSBR is predicted to be £51.7bn, 2.6% of GDP, this year. However, the big change concerns the national debt which is predicted to be 87% this year, almost three times the percentage of GDP in 2007.. This very large increase, despite the austerity policies undertaken by previous governments, can be laid at the door of the financial crisis which struck ten years ago.

The large increase in borrowing, combined with uncertainty about Brexit and the continued low levels of UK productivity  have set the constraints for this year’s budget. Because of the high PSBR, it has been clear for some time that this was not going to be a “give-away” budget. There was a hope that there would be some pleasant surprises up the Chancellor’s sleeve because of the improvement in the forecast for GDP growth this year from 1.4%, made in November, to the latest prediction of 2%. However, this was balanced by a worsening of the forecasts for 2018, 2019 and 2020 because of a predicted fall in household consumption. Although unemployment is forecast to be slightly lower than the November forecast, the combination of higher inflation and the slowdown in earnings growth in 2018 will mean that living standards will be affected.

In the Autumn Statement, the Chancellor focussed on productivity to improve the situation where a German worker produces in four days what it takes a UK worker five days to make. He announced a £23bn National Productivity Investment Fund to increase the money flowing to research, development and innovation in areas such as rail, road, digital improvements and housing over the next five years. This drive to increase productivity continued in the budget with a little money – £270m – for new technologies such as robotics, driverless cars and bio-technology, £690m for local authorities to improve transport and reduce congestion and funds to improve education by increasing funding for new “free schools” and to promote  new technical qualifications – T levels – to improve technical education and attract more people into it.

Other measures include more money for adult social care and funds to place GPs in A&E departments. To offset the increase in business rates, he announced rate relief for many pubs, a discretionary fund for local authorities and a cap on the increase. He also announced increases in the personal tax allowance to £11,500, the starting point for the 45% band to £45,00 and the living wage from £7.20 to £7.50 per hour from April.

These have been paid for partly by increasing national insurance contributions paid by the self-employed to bring them towards the levels paid by employees and partly by reducing the tax free allowance on dividends. The former has caused considerable discussion since it appears to contradict a manifesto promise made by the Conservatives in the 2015 election and also, given that the self-employed are  often entrepreneurs, this move contradicts the Chancellor’s  wish to make Britain “the best place in the world to start and grow a business”.

POSTSCRIPT: While this post was being written, the political fall-out among Conservative MPS over the increased national insurance contributions has grown. The Prime Minister has defended the change as “fair” but announced that it would not be voted on until after proposals for extra rights for the self employed are published in the Autumn.

 

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2 thoughts on “The Budget

  1. christiewanstall says:

    Spring Budget 2017

    The government is pledging to fund improvements to transport infrastructure, including investing £690 million in new local transport projects which will improve congestion. In doing so, this will cause firms to improve their efficiency and therefore, cause an increase aggregate supply in the economy. Unemployment will also fall as a result of this expansion of aggregate supply. Additionally, a reduction in congestion will also equate to a decrease in pollution, which in turn will improve the environmental quality of Britain. Furthermore, education for 16 to 19 year olds will also improve with the new introduction of T-levels, where students will take part in an industry based work placement too. By being educated in fields such as construction or agriculture at such a young age can only benefit those whom are wanting to enter such industries. In turn, this will also enable students to specialise in particular fields and exemplify their expertise, leading to a rise in the volume of skilled workers in the British economy and resulting in long run economic growth. This policy will also help to reduce structural unemployment in the long term. However, this will take many years to come into effect as the policy will only be introduced from autumn 2019, and the time taken for the students to actually be educated in the subject field will also take many years. The spring budget also stated that taxes will rise for the self employed from 9% to 11% (for those earning over £8060), coming into effect in 2019. Although this strategy will increase tax revenues by £145 million per year (by 2021) this will also discourage new businesses from starting up due to increased costs. Due to a decline in start up firms, economic growth could potentially slow down. As well as this, there will be less competition in the industry therefore firms will not be forced to price their products as competitively, therefore prices of goods and services may rise.

    Overall, there is evidence to suggest that the introduction of increased spending in the education sector will cause long run aggregate supply to increase, thus enhancing the maximum sustainable output of the British Economy. This will be aided by the additional investment in infrastructure. However, long run aggregate supply may not increase by as much as the government may have hoped due to the increase in taxation on the self employed. This motion will further decrease the confidence of those thinking of starting up a business, further to the confidence knock of Brexit. As a result of this, many firms may chose not to invest or entrepreneurs may choose not to create a company, due to the high taxation in which they will face, thus discouraging competition and innovation in the market.

    Liked by 1 person

  2. Mr A Dean says:

    Gloria Ma’s view…

    On 8th March 2017, the Chancellor of Exchequer Philip Hammond presented his budget to House of Commons. In his speech, he announced that the UK economy growth rate will fluctuate in the next four years due to Brexit and outlined his blueprint to cut down the budget deficit to release the burden for future generation and create a stable platform to trigger Article 50. Despite a few more public funding schemes and a sophisticated focus on R&D in sciences and technology, the major reformation is to increase the self-employed NIC rate from 9% to 10%. As Hammond stated ‘the deficit is down, but debt still too high (£1.7 trillion). Employment is up, but productivity remains stubbornly low’, stimulating UK economy to an efficient level is the most significant task on board. Although there are a range of Tories and the oppositions argue that such an increase in self-employed NICs rate will discourage small businesses and self-employment, it is noticeable that the self-employed people are paying much less than those who are employed by firms. Therefore, such an increase in tax can rebalance the income distribution. Moreover, it is only for those who earn £6250 or above per month who needs to pay around 60 pence a week, thus £31.20 a year. Mr Hammond has also promises that there will not be a rise more that 50 pounds a month for the majority of self-employers.

    Overall, I think it is a practical budget especially at the stage of Brexit because taxes have to rise in certain aspects to prevent further increase in debt. The reformation on self-employed NICs was over exaggerated by some MPs as it will not be significantly influential for the majority. Furthermore, the extra spending on welfare such as education, £2 billion for adult social care and £425 million in NHS over the next 3 years will profoundly improve the living standard of people. Hence, Britain is fully prepared to be both economically and politically independent to a sustained level.

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