Posted by jonathanfullarton - March 15, 2019 12:14 pm Spring Statement Highlights

Wednesday 13 March

Philip Hammond delivered his Spring Statement today with a promise to keep his speech short as the House had other pressing matters to deal with following Prime Minister Theresa May’s second defeat on the ‘Brexit’ vote.

He acknowledged the uncertainty of the UK economy, as a result of last night’s vote, but remained confident that a deal would be agreed over the next few weeks.

With both borrowing and debt both forecast to be lower in every year than at last year’s Budget, the Chancellor recognised the achievements of British workers and the government during the period of austerity.

Due to a period of nine consecutive years of growth, the economy is already growing faster than France, Italy and Japan and this year the International Monetary Fund (IMF), together with the Organisation for Economic Co-operation and Development (OECD) have forecast that the UK economy will grow faster than that of Germany.

However, he warned of the impact of a no-deal Brexit with possible loss of jobs, higher wages and higher prices in the shops, together with a less positive short to medium-term forecast for the economy.  He urged the House to work together and put politics aside on behalf of the nation to avoid this, whilst announcing plans which the government would be put in place in case of this outcome.

Office for Budget Responsibility (OBR) forecasts

Growth

Despite the slowing World economy, the OBR expects Britain to continue to grow in every year from 1.2% this year and forecasts thereafter at:

• 1.4%    2020
• 1.6%    2021
• 1.6%    2022
• 1.6%    2023

Cumulative growth over 5 years now forecast at slightly higher than the Budget forecast.

Borrowing forecasts

The OBR forecasts that this year, borrowing will be 1.1% of GDP, £3bn lower than forecast at the autumn Budget, with forecasts set to fall to the following levels:

• £29.3bn in 2019/20
• £21.2bn in 2020/21
• £17.6bn in 2021/22
• £14.4bn in 2022/23
• £13.5bn in 2023/24 – its lowest level in 22 years.

Philip Hammond confirmed we are on track to meet fiscal targets early, with the cyclical adjustment deficit at 1.3% next year, falling to just 0.5% by 2023/24; and with a fiscal headroom against the fiscal mandate in 2021 increasing from £15.4bn at the autumn Budget to £26.6bn today.

Borrowing as a % of GDP

Borrowing forecasts, as a percentage of GDP, is also set to fall next year to 82.2% with further forecasts as follows:

• 2020/21   79%
• 2021/22   74.9%
• 2022/23   74%
• 2023/24   73%

Employment

The Chancellor was delighted to report positive labour growth with the OBR forecasting that since 2010, 3.5m more people are in work with a further 600,000 new jobs forecast by 2023.  Unemployment is currently at its lowest level since 1975 (4%), a record number of females are in employment, and last year 96% of the new jobs created were full-time positions.  Meanwhile, wages have increased at a faster pace in the last decade with forecasts set to continue growing faster than inflation.

Public spending

Following a necessary period of austerity the Chancellor reminded the House that since 2016 he has made over £150bn of new spending commitments, including prioritising the NHS with an additional £34bn of funding per year by the end of the parliamentary period.  A promise to deliver better cancer and mental healthcare, a transformation of GP services, together with increased numbers of nurses and doctors all resulting in better outcomes for patients.

The Chancellor has committed to a 3-year Spending Review, which will take place before the summer recess, and will conclude in the autumn Budget.  Depending on the outcome of the Brexit deal, this will look at additional spending on other public spending priorities such as social care, local government spending, schools, police, defence and the environment.

He said that if we see a Brexit deal, combined with an orderly transition, we would also see a deal dividend, an economic boost with the recovery of business confidence and investments, together with a resulting fiscal boost.

Open and competitive UK

To make the UK a more appealing place to visit and do business with after Brexit, the following steps were announced:

• citizens of the US, Canada, New Zealand, Australia, Japan, Singapore and South Korea will, from June 2019, be permitted to use e-gates at UK airports and at Eurostar terminals in a bid to speed up the processing of passengers on arrival in the UK.
• research institutes and innovating businesses to benefit from an exemption for PhD-level occupations from a cap on high-skilled visas from this autumn, whilst overseas research activity will also count as residence in the UK for the purpose of applying for settlement, meaning researchers will no longer be unfairly penalised for time spent overseas conducting fieldwork.

Effect of a no-deal Brexit

The Chancellor remained confident of a deal but said that the government, as part of their duty, had planned for every eventuality by:

1. putting plans in place to minimise disruption to our financial system, with the Bank of England having judged the UK economy to be resilient to any likely no-deal shock.
2. working across Whitehall to put in place mitigations at our borders, although we cannot regulate how the EU will regulate its border in the result of a no-deal Brexit.
3. publishing a temporary UK No-deal Tariff Schedule, which had been prepared, he said, by carefully balancing the needs of producers and consumers. (see more highlights below)*
4. equipping the Treasury and the Bank of England with the tools of fiscal and monetary policy available to us including the fiscal headroom, which the Chancellor had set aside especially in the event of a no-deal Brexit outcome.

Philip Hammond warned that, in the case of a no-deal Brexit, that, “there would be a short to medium-term reduction in the productive capacity of the British economy and, as it is already acting at full or near capacity, any fiscal and monetary response would have to be carefully calibrated as not to cause inflation, compounding the effect of any movement in the exchange rate on the price of goods in our shops”.  He further warned that, “whilst fiscal and monetary intervention might help to smooth our path to a post Brexit economy, this would be temporary, and would not allow us to avoid the effects of a relatively smaller economy, nor the pain of restructuring”.

UK Tariffs – in the event of No-deal Brexit (highlights)*

• 82% of EU imports to be tariff free – currently 100%.
• 92% of imports from the rest of the world would pay no border duty – currently 56%.
• The UK car industry will receive some cushioning with some imported cars attracting tariffs but car parts from the EU will be tariff free, helping car plants based in the UK.
• The ceramics industry will also receive some protection from cheap imports.

Summary of other announcements made

• The Chancellor will chair a round-table on the effects of minimum wage on productivity.
• An Audit committee will review late payments with a new requirement for large companies to report their payment terms.
• A £37bn national Productivity Fund to be established to provide selective funding for some regions.
• £3bn for affordable homes.
• A commitment to end of fossil-fuel heating systems in all new houses by 2025.
• £100m for police to tackle knife crime.

Comment from Martin Humphreys, Partner & Head of Tax, McCabe Ford Williams, Cranbrook

With parliament in turmoil over Brexit, and with the move to a one fiscal policy per annum (now an Autumn Budget), the Spring Statement, unsurprisingly, contained no major new surprises.  Instead, it outlined the current position of the UK economy together with updated forecasts from the OBR.  Obviously, the outcome of the Brexit vote could have a significant impact on the forecasts and the ongoing uncertainty continues to impact on UK business, as costs are incurred planning for a worse case scenario which is almost impossible to predict.