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.