The Autumn Budget Preview

Introduction
We should probably begin this Preview in Boots the Chemist, shopping for Strepsils and Lemsip. The Prime Minister’s cold was widely blamed for her lacklustre performance at the Conservative Conference: sadly, there was only one speech at the Conference which received even more criticism than the Prime Minister’s. Step forward Philip Hammond, Chancellor of the Exchequer. ‘Muted’ is a polite way to describe the applause when he finished and, as one critic put it, “If there was ever a ‘Hammond for leader’ bandwagon, that speech has stopped it in its tracks.”

Nevertheless, Philip Hammond will present his Autumn Budget speech on 22nd November, having moved the Budget from its traditional spring date. Any Chancellor’s speech is always a mixture of politics, economics, showmanship and sleight-of-hand: we can expect plenty of the first two ingredients in a month’s time. ‘Showmanship’ is probably not a word that is in Philip Hammond’s dictionary and the rumours suggest it will be a ‘safety-first’ Budget. Sleight-of-hand? We will have to wait for the small print of the actual speech to judge that.

The Political Background
Not long after Hammond delivered his final Spring Budget speech, Theresa May announced a General Election. The Chancellor must have rubbed his hands in glee: a sure and certain Conservative majority of between 80 and 100, giving him five years to sort out the nation’s finances, steer the UK through Brexit and perhaps think, as he stared steadily into his shaving mirror, Goodness me, Theresa might have had enough by then. Who better to pick up the reins of a strong and stable government…?

As we now know, the General Election did not go according to plan. No doubt the inquest is still being held at Conservative Central Office. No senior Conservatives emerged from the campaign with credit. Philip Hammond further blotted his copybook with his forgettable speech at the Conference, and then made a leaden-footed intervention in the Brexit debate. First he was seen dining with George Osborne and then he over-compensated by describing Europe as ‘the enemy’. Small wonder that former Chancellor Nigel Lawson and pro-Brexit Tory backbenchers are now calling for his sacking, with Monday morning’s Times headline proclaiming ‘Hammond faces Tory rebellion over Budget’.

So in roughly four weeks, Philip Hammond will get to his feet, take a sip of water and try to save his career. Perhaps he should drink something stronger? Chancellors are the only politicians allowed to drink in the Commons chamber: William Gladstone drank sherry and a beaten egg. Even the equally uncharismatic Geoffrey Howe reached for a G&T.

The Economic Background
Whatever he chooses to drink, at least the Chancellor has some recent good economic news to fortify him.

Unemployment was down by 52,000 in the three months to August, falling to 1.4m, with the jobless rate remaining unchanged from the previous quarter at 4.3%. The unemployment rate is the lowest since 1975: the problem for the Chancellor is that it is not being perceived as good news while the squeeze on wages continues. The Office for National Statistics (ONS) said that wages rose by 2.1% for the June to August period: with inflation now up to 3%, you don’t need to be a mathematician to work out that real wages are falling.

The figures for September from the ONS confirmed that the budget deficit for the month – the gap between what the government spends and what it collects in taxes – was the lowest September figure for the last ten years. The deficit was £5.9bn, down 11% on September 2016. Many economists had forecast a deficit of £6.5bn, so the news was a real boost ahead of the Budget, especially as the deficit for August was revised down by £1bn to £4.7bn.

September was the third straight month in which the public finances had been better than the analysts had predicted – but public sector net debt (excluding the state owned banks) has still increased by £145bn since September last year and – you may want to sit down – now stands at £1,785bn. That’s equivalent to 87% of the UK’s gross domestic product.

That figure sounds alarmingly high, but how does it compare? According to figures from the CIA World Factbook and the IMF, the equivalent figure for Germany is 69%, France is 96% and Italy an eye-watering 132%. Net debt in the US is 73% of GDP: in China it is just 20% – so the UK is by no means as bad as some of Europe’s weaker economies. Clearly, though, there is a lot of work to be done in reducing Government debt – and the interest we all pay on it – to much more manageable levels.

But as always with the British economy, the glass can also be seen as half-empty. Inflation has just risen to 3%, its highest level since 2012, fuelling the possibility of the first rise in interest rates for more than a decade. Perhaps more worryingly for the Chancellor though, the Office for Budget Responsibility has reined back its earlier optimistic predictions about UK productivity.

In March, the OBR predicted that productivity in the UK would grow by 1.7% this year, theoretically giving the Chancellor an extra £26bn for the public finances. After a review, the OBR discovered that it had over-estimated UK productivity for the last seven years. Hourly output declined by 0.5% in the first three months of the year and by 0.1% for the April to June period. Small wonder that two-thirds of the £26bn windfall has now vanished into thin air.

What do people want from the Budget?
As you might expect, the Chancellor has not been short of advice as he prepares his speech. Sam Bowman, Executive Director of the Adam Smith Institute says the Chancellor must fix the housing market: “[The Conservatives] wonder how to connect with young people: the answer is simple … give them somewhere to live.”

The Institute of Directors want ‘serious measures to boost the economy’ and the TaxPayers’ Alliance want a reduction in the overall tax burden – which is now approaching levels not seen since the 1960s.

Politically, Hammond’s colleagues in the Commons also want to see more measures to help young people. Why did the Conservatives do far less well than they expected in the General Election? In part, because young people voted in far greater numbers than they previously had, and they voted for Jeremy Corbyn and his message of hope.

That is hardly surprising – as one commentator put it, ‘The Conservatives cannot expect young people to vote for them as they are giving them nothing to conserve.’ But in trying to woo the young, Hammond has any number of concerns to address: their inability to get on the housing ladder, the way rents are rising as a percentage of income, the number of young people with debt problems, the student loans fiasco and – in the longer term – the growing threat to jobs from robotics, artificial intelligence and low-wage economies in Europe and the Far East.

What are we likely to see on 22nd November?
If the early reports are to be believed, the answer to that last question is simple: help for those young people. The Conservatives have already used their party conference to announce extra cash for the ‘Help to Buy’ scheme, a freeze in tuition fees and more money for social housing, but Hammond will need to go further.

How is he going to do this? According to last week’s Telegraph, one of his tactics will be a raid on older people to pay for tax breaks for the young. The buzzword will be ‘intergenerational fairness’ with Hammond apparently planning to offer tax breaks – or possibly a reduction in national insurance contributions – to workers in their 20s and 30s, paid for by cutting tax reliefs for older and better off workers.

Well, as Sir Humphrey might have said, ‘That’s a very courageous decision, Minister.’ Another contributory factor for the Conservatives’ poor showing at the Election was the ill-thought plans for a ‘Dementia Tax’. Now along comes the Chancellor with plans for a ‘tax on age’. Small wonder that there are plots being hatched on the back benches…

Despite the need to be bold, the indications are that Hammond is planning a ‘safety-first’ Budget with Tory backbenchers being warned to expect no headline grabbing announcements, thanks to the pessimistic forecasts from the OBR.

Looking back to the Spring Budget, Philip Hammond introduced a ‘market leading savings bond’, cut back on ‘middle class tax perks’ and invested in the country’s infrastructure. We may well see further measures along these lines in November, together with more steps to help traditional retailers compete with online competitors. We can expect to see more money ‘ring-fenced’ for the NHS as it prepares for winter and – given the recent press coverage from Hollywood – he may earmark more money to protect vulnerable women.

Let us, though, take one guess at a measure designed to grab some headlines: the Chancellor has been extensively lobbied by the Wine and Spirit Trade Association. There have already been measures taken in the past to protect Scotch Whiskey: don’t be surprised if he freezes planned duty increases on English and Welsh wine.

All the above would be very worthy measures – but they will do nothing for the Chancellor’s own job prospects or for the popularity of a Government that gives every appearance of losing control of the political initiative. A gloomy Chancellor may well present a gloomy Budget on a gloomy November day. That will not play well either politically or psychologically. You wouldn’t bet against it being Philip Hammond’s last Budget; neither would you bet against it being the last Autumn Budget…