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Budget 2018: Deficit windfall can’t hide £1.8 trillion public debt

Parliament

A drop in the deficit can’t mask levels of public debt at 85% of GDP – Plus all the latest news on the 2018 budget

Chancellor Philip Hammond has been granted a significant windfall of approximately £13 billion, (£11.6 billion lower than predicted in March) following a reduction in the nation’s deficit. Earlier this month the Office for Budget Responsibility (OBR) identified a reduction of £13 billion in how much borrowing exceeds state income. While the deficit is now significantly lower than originally predicted it still represents an additional to the national debt of £24 billion.

By May this year public debt was reported to have reached £1.8 trillion. Despite this a Treasury spokesperson told the Guardian last month that the first six months of 2018 represented the lowest half-year borrowing for 16 years – “showing the strong progress we have made in fixing our public finances. But, at over 85% of GDP last year, our debt remains too high.” That level of debt, as well as predictions that growth will remain around a meagre 1.5%, has led to scepticism over whether the government will reach its target to bring net borrowing to zero by the middle of the 2020s.

Hammond’s budget is designed to prepare the UK for leaving the EU on 29 March 2019. Speaking to the media this week he has said that he expects the government to secure an orderly deal-based Brexit but conceded a no-deal Brexit would most likely require a whole new budget. An orderly Brexit could provide a second windfall as it frees the Chancellor to spend the £15 billion set aside as a financial ‘buffer’ in the event of a no-deal.

The OBR’s latest report on Brexit and the UK’s economic predictions stated: “Currently, our forecasts assume an orderly end to the negotiations between the UK and the EU and so a smooth transition from the pre- to post-Brexit worlds. This would be most likely if the UK and EU finalise the current version of the draft Withdrawal Agreement, which contains a transition period until the end of 2020. But a disorderly exit is not impossible and it could have a severe short-term impact on demand and supply in the economy and on the public finances.”

Other budget developments:

Hammond hails a “new chapter” in the UK’s economic history and says “austerity is finally coming to an end”.

“The stakes could not be higher,” says Hammond on prospect of double deal divided if a good deal is achieved, ending austerity and releasing the buffer.

OBR expect growth to be “resilient” at 1.6%.

“Britain’s job miracle is set to continue,” as chancellor claims 2 million more jobs created since 2010 with the number of low-wages falling.

Borrowing of 1.3% of GDP met by 2021.

“We are no longer borrowing at all to fund current spending”- implies the deficit is currently funding interest on previous debt (£1.8 trillion).

Deficit predicted to be 0.8% by 2023-24.

Borrowing predicted to be £11.6 billion lower, at 1.2% of GDP.

£1 billion extra for the MoD to help cyber-warfare capabilities.

£200 billion private sector bill “would be the most potent symbol of economic mismanagement by the last Labour government– if only Gordon Brown hadn’t sold the [nation’s] gold.”

£675 million “high streets fund” to aid councils facilitate re-development of commercial into residential. “The change that our High Streets face is irreversible.”

Beer, cider and spirits duty frozen; wine not. Savings predicted to be made as inflation rises.

£1 billion set aside to help deliver Universal Credit without loss of benefits.

Income Tax: Personal Allowance raised to £12,500 and higher rate moved to £50,000.

Estimates on OBR projections suggest Britain will have a deficit of £19.8 billion in 2023-24, a year before the government wants it to be zero.

Reaction:

Carolyn Fairbairn, CBI Director-General, said:

“This was a rock-solid budget, bringing more treats than tricks for business. “It recognises the enormous contribution enterprise has made to balancing the UK’s books through jobs, pay and tax and responds to many of the recommendations that firms have made.

“But while the Chancellor has reduced some of biggest barriers to growth, he has missed some opportunities. That said, the new investment in broadband, research, housing and infrastructure will help tackle the UK’s glaring regional equalities head on.

On a digital services tax: “The picture on tax is more mixed. Going it alone on a digital services tax is high risk. The Government should move in step internationally, leading multilateral solutions, or risk losing our global competitive edge in digital. All businesses should be at the cutting-edge of digital technology. If the UK is to break ranks with the international community, any new approach must be carefully built on evidence from a wide range of enterprises of all sizes.

On business rates: “Smaller businesses will be relieved by the support on Business Rates at a time where the current system is crippling many high streets. But larger retailers and manufactures – and the millions they employ across the UK – will continue to suffer needlessly until there is a full, in-depth review.

On the impact of a ‘no deal’ Brexit: “But there is no hiding from the dark clouds of Brexit uncertainty. The Chancellor has made clear that this Budget will need urgent attention in the event of ‘no deal’, showing yet again the seriousness of the situation and the need to get a good deal over the line.”

 

CEO and Founder of Comfortable Living Saadat Khan:

“Any initiative to combat the inadequate delivery of property stock is a step in the right direction, but another lacklustre focus on property will no doubt leave UK home buyers and sellers feeling let down once again.

“For far too long we’ve been held to ransom by the greed of the big house builders, dictating where and when they want to build and land banking in order to maximise their own profits. Yet again today we’ve seen the chancellor sidestep responsibility in bringing them to task on the issue of land banking and it leaves the small self-builders of this nation with little or no chance of competing.”

 

Richard Rogerson, CEO of RFR Property:

“The Chancellor made a further amendment to SDLT by extending first-time buyers’ relief so that buyers of shared ownership property can benefit.  The relief doesn’t apply to purchases over £500,000 and therefore has limited impact on the prime central markets.  However, it does raise the question of whether such reliefs, together with the government’s Help To Buy Scheme (reported to be closing in 2023), are (perversely) working to inflate prices for first-time buyers.”

 

Vivek Madlani, Co-founder and CEO of freelancer financial planning service Multiply said:

“Although now delayed until April 2020, the Chancellor’s announcement that IR35 will be extended to the private sector will send shockwaves through the self-employed community. Millions will now worry they will need to pay far more tax on their earnings – it could reduce their net income by up to 25%. In some cases they may need to backdate payments. Clearly, those that are trying to game the system should be called out, but it is a highly complex area and many contractors struggle to understand their IR35 status.”

 

Will Fraser-Allen, deputy managing partner, Albion Capital:

Support for tech entrepreneurs –

“The Chancellor’s Budget is extremely positive for the UK’s entrepreneurs and, in particular, its thriving community of young technology companies. The Government has clearly recognised the role that tech scale-ups play in the economy and has given the green light on a range of initiatives to ensure the UK is at the forefront of business innovation.”

 

Jeff Bromage, managing director for Saga Personal Finance:

Stamp Duty –

“Whilst we welcome the changes to Stamp Duty for first time buyers, the chancellor has yet again missed a vital opportunity to increase fluidity in the housing market by reducing the cost burden for those right-sizing ready for retirement.

“Whilst many people in larger homes would like to downsize, three in five members tell us that the costs of doing so are often so prohibitive that it would eat up much of the benefit they would have hoped to gain. They tell us that this leaves them little choice but to stay put in houses that are not designed, or indeed appropriate, for them for the future. The Chancellor had a prime opportunity in this budget to allow one stamp-duty free move to those looking to downsize – and it needn’t be a cost to the exchequer!”

 

Former Pensions Minister, Baroness Altmann:

Pensions & Brexit –

A sigh of relief – no news about pensions: “After so much speculation that the Chancellor would look to raise money by reducing the generosity of pension tax relief, many will be relieved to see no changes announced. There have been so many reforms in recent years that a period of stability is helpful, especially as the auto-enrolment programme will be completed in April 2019.”

Consultations on charges and pensions dashboards: “The Budget has announced there will be new consultations later in the year on disclosure of pension charges and also on the introduction of pensions dashboards. Interesting to see that the consultation will look at more than one dashboard and it will link to the State Pension. However, we are a long, long way from any actual dashboard being legislated for or rolled out.”

Budget generally exceeded expectations: “It seems pretty obvious that no sensible Chancellor would wish to rock the boat at this juncture in our national development. He has announced that austerity is coming to an end. The UK has met both his fiscal rules three years early and there is therefore headroom to boost some spending. He has certainly exceeded many people’s expectations with support for different parts of the population and the economy ahead of Brexit.

But no help to resolve the injustice of low earners paying 25% extra for their pensions: “Although it is welcome, the rise in the personal tax threshold to £12,500 does have a downside. Yes, it should help reduce opt-out rates for auto-enrolment, but it will bring more people into the zone in which they have to pay 25% extra for their workplace pension. Anyone who earns below the personal tax threshold is entitled to basic rate tax relief – equivalent to a 25% bonus on their pension – but they cannot get that money if their employer uses a Net Pay scheme or salary sacrifice. This injustice affects low earners, mostly women and needs to be urgently remedied.

Also no new measures for long-term care: “It is disappointing that there are no new measures to encourage or incentivise people to put money aside for funding long-term care needs. Just promising more money is welcome, but nowhere near enough to address this crisis. We are still waiting for the promised Green Paper ‘shortly’! Meanwhile, families are not prepared for care, nor is the Government, yet this looming crisis could eat up the resources of many families who might have been able to put some funds away if they had known about it. It could also break the NHS.

Implied threat to Brexiteers to abandon thoughts of No Deal Brexit: “With the announcement of politically popular measures, the Chancellor has also held out the interesting threat that these could be abandoned if there is a No Deal Brexit. This throws down a challenge to Tory extreme Brexiteers that if they do not accept a Brexit deal, but push us towards the cliff-edge next March, these popular policies may be undone. But, assuming there is a reasonable deal, the Chancellor’s plans are to increase spending on investment and infrastructure, to continue cutting personal taxation and to boost resources for the NHS, especially mental health.

“The aim of this Budget was to please as many people as possible, regain political momentum as a Government with policies to help the low paid, keep taxes low and boost growth. It probably achieved its aims.”