The Spring Statement was predicted to be a dull affair and chancellor Phillip Hammond certainly delivered on that front.
Hammond resisted the urge to tinker with tax or spending changes, and indeed to the relief of the pension industry he opted against making further changes to pension legislation. From next month, though, various changes to pensions that were previously announced are coming into force – check out what they are and whether you will be impacted.
As expected there were also no changes to the Isa rules, despite calls by a group of MPs and saving experts to simplify the current Isa regime in favour of an ‘Everything Isa’.
It was widely anticipated there would be a lack of ‘rabbits’ being pulled out of the chancellor’s hat in the new slimmed-down Spring Statement; Hammond instead used the speech as an opportunity to provide an update on public finances and the health of the economy.
Below we round-up the key takeaways from the Spring Statement 2018.
The economy is (so far) winning its Brexit battle
In the run-up to the referendum to decide whether Britain should retain its membership of the European Union, various economists and respected think-tanks warned that a victory for the Leave campaign would put Britain in danger of entering a recession.
The National Institute of Economic and Social Research (NIESR), for example, put the probability of a recession (at least two consecutive quarters of GDP declines) occurring sometime before the end of 2017 to sit at around 50 per cent.
This doomsday scenario has so far not played out, with the Office for Budget Responsibility today revising up its growth forecast for the year from 1.4 to 1.5 per cent. Looking further out, though, the OBR has stuck with its initial estimates, predicting growth of 1.3 per cent in 2019 and 2020, rising to 1.4 per cent in 2021 and 1.5 per cent in 2022.
The government points to manufacturing enjoying its longest period of expansion in 50 years and a low unemployment rate as two plus points in the face of Brexit uncertainty. It also argues that public finances have reached a ‘turning point’ as borrowing is falling and debt is expected to decline as a share of GDP from next year.
Inflation is also expected to cool over the coming year, with Hammond stating that he expects the currently inflation level of 3 per cent to fall to 2 per cent. If this plays out consumers will have more spending power, particularly if wage growth strengthens. Hammond himself predicted that real wage growth would turn positive (rising above inflation) in the first quarter of 2019.
Maike Currie, investment director for Fidelity International, points out that a possible reason for this ongoing disconnect between employment and wage growth could be the long-running backdrop of economic uncertainty.
She adds: ‘Indeed, one of the big questions this year is whether the global economic recovery will eventually feed through to wage growth. If it does follow Hammond’s forecast, this should be supportive of consumer spending, the linchpin of the UK economy.’
But the economy is not out the woods yet….
On the other hand, sceptics can point to the fact that Britain’s economy is currently among the weakest performers of the G7 nations. One of the big drivers is a lack of productivity in the economy, which has persistently failed to pick up since the financial crisis. As things stand today, the productivity puzzle is proving a challenge that the government is struggling to solve.
Lucy O’Carroll , chief economist at Aberdeen Standard Investments, says there’s ‘little to cheer’ despite Hammond’s upbeat speech on the health of the economy. She says: ‘The chancellor was always clear that today’s event was to be a modest one, and he kept that promise. But there is little to cheer by way of economic progress. A woeful growth outlook by past standards. Potentially massive dislocation for the economy just around the corner. And all subject to huge, Brexit-related uncertainties.’
Further, there have been conflicting reports about the real state of the UK economy. Last month, the Bank of England signalled that an interest rate hike could happen as soon as May, as the economy keeps expanding due to global growth.
But according to a government document leaked in January, the impact of Brexit would mean the UK is going to be worse off outside the European Union under each of the three most likely scenarios.
The softest Brexit option of continued single-market access through membership of the European Economic Area would still lower growth by 2 per cent.
Under a comprehensive free trade agreement with the EU, UK growth would be 5 per cent lower over the next 15 years, according to the analysis.
A ‘no deal’ scenario would see the UK revert to World Trade Organization rules, and that would reduce growth by 8 per cent over that period.
The report found that every UK region would be affected negatively, with the North East and West Midlands facing the biggest economic hits.
The housing market
Outside of the macroeconomics, Hammond spent a good portion of the 25-minute-long speech providing an update on his plans to tackle the UK’s chronic housing shortage.
He announced the government are working with 44 areas in the UK to build 300,000 homes a year by the mid-2020s. Additional money will be handed to small housebuilders in order to help achieve this goal, while it was also announced that London will receive £1.67 billion to build a further 27,000 affordable homes by the end of 2021-22.
Hammond also revealed that 60,000 first time buyers have so far taken advantage of the stamp duty exemption, previously annouced at the August Budget.
From April it was confirmed the National Living Wage will rise to £7.83 per hour, which works out at £600 extra a year for full-time workers.
Further, the tax-free personal allowance increase from £11,500 to £11,850, which takes effect in April 2018, means that in 2018-19, a typical taxpayer will pay £1,075 less income tax than in 2010-11 according to government sources.
In total, the changes should result in taxpayers on the lowest wage rates being almost £1,000 a year better off.
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