When is a Budget not a Budget?

At the time of the Autumn Statement, the Chancellor of the Exchequer set out his plan to move the Budget, which covers the decisions on key policy changes, to the autumn from 2017 onwards. It is no surprise therefore that the EY ITEM Club Spring Budget preview sets out an expectation for a relatively low-key event on 8 March. Although it is described as the Budget, in the context of the Chancellors’ proposed changes, it seems unlikely that a Chancellor who resisted the temptation for a major policy reset in the autumn will do so now.

Will it tell us anything new?

The main news in the Budget is likely to be the OBR’s update to the economic outlook. The EY ITEM Club expects that this will not involve any dramatic shifts and will be on the following lines:

• The OBR is expected to revise down its forecast for public sector net borrowing in the current fiscal year, 2016-17, by around ￡3bn to close to ￡65bn
• An upward revision to the 2017 forecast for GDP growth from 1.4% to 1.6-1.7%
• A higher forecast for debt servicing costs of around ￡2bn in 2020-21, compared to the level expected last November, due to an upward shift in the forward curve for gilts

The current UK Government is much more circumspect than its recent predecessors about sharing thinking on policy before the details have been worked through. As a result, commentators and analysts, starved of the regular flow of information from previous administrations, will be looking at the detail behind the headlines to try and glean what they can about the future direction of policy and the areas that the administration may have concerns over.

Probably not on Brexit…

Inevitably, there will be significant interest in how the OBR tries to incorporate the latest developments around Brexit into its forecasts. In November, it made much of the fact that it had

“ been given no information regarding the Government’s goals or expectations for the negotiations that is not already in the public domain.”

Since then, as the EY ITEM Club notes, the Government has laid out its plans, first in a speech by Theresa May[1] on 17 January and then in greater detail in a White Paper.[2] If the OBR moves its forecast in the key areas of trade and migration, then we may glean some greater insight into the sensitivity of the economy to these factors.

…or short-term changes to economic policy…

There may be some relatively minor tweaks to policy to try to maintain economic activity at current levels. Most obviously, we might see a cut in fuel duty or a freeze or reduction in Air Passenger Duty, allowing the Chancellor to soften the squeeze on living standards.

With the corporation tax rate due to fall from 20% to 19% this April, and then to 17% in April 2020, the UK’s corporate tax regime is already looking very competitive by large economy standards. Action in this area seems unlikely and any moves could be interpreted as the Chancellor having some concern about the UK’s future competitiveness for foreign direct investment.

…but more long-term thinking would be welcome…

The Chancellor has signalled his desire to shift the heavy lifting on policy to the autumn. There is a risk though that policy is overly focused on delivering Brexit, while other necessary economic reform is neglected. Two obvious areas that businesses would like to see further thinking on are business rates and the apprenticeship levy.

• April will see the introduction of the apprenticeship levy, at a cost to employers of close to ￡3bn per year. Given the cost pressures faced by firms from rising commodity prices, the national living wage and expanding pension auto-enrolment, there is perhaps a small chance of the Government watering down this policy, perhaps excluding certain sectors or, more radically, delaying implementation for a year. However, there is a case for a more fundamental review to ensure everyone is clear what the objectives of this policy are, and whether the current scheme is well placed to allow the UK to deliver on these
• We may also see some business-friendly moves on the thorny issue of business rates. Under current plans, business rates are indexed to increase each year by RPI inflation. A switch to the current official (and generally lower) CPI measure is due to take place in 2020-21. The Treasury could heed the calls of organisations like the CBI, and bring forward the switch at a cost of around ￡350m per year. If the Government is serious about its desire to rebalance the economy, then more radical calls such as excluding plant and machinery from property valuations, merit consideration.

…and is needed in certain areas.

In political terms, the NHS is emerging as a major issue for the Government. It was recently reported that the number of patients on hospital wards in England has been at unsafe levels at nine out of 10 NHS trusts over the current winter.[3] Increasing pressure on social care spending has also been very public. The Government could find itself in the position of delivering a smooth Brexit, and yet still disappointing the public if dissatisfaction with the NHS increases. Any moves to relax the constraints on growth in NHS and social care funding in the upcoming Budget would signal that the Government is alive to the issues in these sectors.

A low-key Budget but worth watching.

Expectations are for a low-key Budget with no significant policy changes. If this is what happens, then we can take it that the Chancellor is reasonably confident about the economic outlook. Any shifts beyond the very basic will provide business with hints as to the areas of concern to Government. Beyond this, more strategic moves would provide more confidence to investors that the administration is serious about its desire to transform the UK economy, as well as delivering Brexit.

@MarkGregoryEY

markgregoryeconomics.ey.com

EY ITEM Club is part of our Economics for Business programme which provides knowledge, analysis and insight to help businesses understand the economic environments in which they operate.

[1] ‘The government's negotiating objectives for exiting the EU’, Speech by The Rt Hon Theresa May MP, 17 January 2017, https://www.gov.uk/government/speeches/the-governments-negotiating-objectives-for-exiting-the-eu-pm-speech

[2] ‘The United Kingdom’s exit from and new partnership with the European Union’, HM Government, February 2017, https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/589191/The_United_Kingdoms_exit_from_and_partnership_with_the_EU_Web.pdf

[3] ‘NHS Health Check: Nine in 10 hospitals 'overcrowded' this winter’, BBC News website, https://www.bbc.co.uk/news/health-38853707