The UK budget may prove to be an unexciting event. The NHS, the education service and other parts of the public sector would like it to be the budget that announced more money for government activities and higher pay. Business would like to see tax cuts. The retail sector thinks business rates are too high. The housing sector is not enjoying high Stamp duties. The new higher rates of Vehicle Excise duty for dearer vehicles is part of the reason the new car market plunged from April this year.
The lobbies for both big tax cuts and for large spending increases are likely to be disappointed, as the Treasury has often repeated the view in the run up to the budget that they need to preserve their fiscal discipline. This means there is still no money to splash around on lower taxes or higher spending.
The budget is a formal time to review progress with the economy. The strong growth that the economy demonstrated in 2016 both before and after the referendum vote, has slowed a bit this year. The Bank of England has been slowing the economy deliberately by taking so called macro prudential measures. That means they are reining in bank credit. They have required banks to reduce the flow of new money for car purchase, which they have visibly done. They are seeking more of a squeeze on consumer credit, which is part of the reason for the slowdown in retail spending. They have also kept mortgages a bit tighter. The more they succeed in slowing the economy, the more the figures for revenue will fall and the deficit to tackle will rise. The Office of Budget Responsibility may also achieve the same backdrop by lowering their official forecast for productivity growth, a possibility which has been well trailed in the press.
The UK economy has seen two big policy adjustments causing lower activity brought about by past budget and Bank decisions. Buy to let housing and the top end of the residential market was badly hit by the 2016 budget with big rises in Stamp Duty and other taxes. The car market was hit in April this year after good growth.
This reduction in sales was exacerbated by the government dislike of diesels. The first wish of many is that this next budget will not pick on some other sector or way of being enterprising and attack that as well.
There have been press suggestions on lowering the VAT threshold to make many more self employed people pay VAT. This would be an unwelcome reduction in the flexibility of the UK economy, making it more difficult for people to work for themselves and earn a decent living. There have been past ideas of making the self employed pay more National Insurance, which would also be unhelpful. These floated proposals may be dismissed given the bad reception they have received.
Doubtless the Revenue will be looking for more ways of reducing tax avoidance and closing loopholes. The latest Finance Act is a massive document seeking to do just that, but the battle between the Revenue and the clever tax advisers and accountants acting for rich and successful people and companies will continue with new ideas to block.
Savers and investors should look out for the small print that comes with the copious budget documents. The continuous pursuit of more revenue and fewer tax breaks may have an impact on people’s savings.
John Redwood is chief global strategist at Charles Stanley.
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