Af­ter Trump and Brexit, UK FM weighs fall­out Ham­mond likely to look at tax, ben­e­fits op­tions

Kuwait Times - - BUSINESS -

Five months to the day af­ter Bri­tain voted for Brexit, its fi­nance min­is­ter will out­line how the gov­ern­ment plans to cope with the eco­nomic fall­out and vot­ers’ frus­tra­tions which had echoes in Don­ald Trump’s US elec­tion tri­umph. Philip Ham­mond, the Chan­cel­lor of the Ex­che­quer, is due on Nov 23 to an­nounce spend­ing and tax plans un­til the end of the decade in his first bud­get up­date since tak­ing of­fice af­ter the June vote to leave the Euro­pean Union.

His speech to par­lia­ment is likely to build on Con­ser­va­tive Prime Min­is­ter Theresa May’s pledge to serve fam­i­lies that are “just man­ag­ing”-a re­sponse to dis­con­tent with the po­lit­i­cal es­tab­lish­ment and in­come dis­par­ity that was ex­posed by the ref­er­en­dum.

Her prom­ise leaves Ham­mond with a dif­fi­cult chal­lenge: how to ease the squeeze on liv­ing stan­dards and re­duce in­equal­ity when the pub­lic fi­nances are deep in the red and the econ­omy is likely to slow sharply next year, re­duc­ing tax rev­enues. Ham­mond has hinted at more spend­ing on in­fra­struc­ture, build­ing more homes and giv­ing com­pa­nies in­cen­tives to over­come their Brexit nerves and in­vest.

But af­ter a decade of stag­nant in­comes the is­sues of liv­ing stan­dards and in­equal­ity are at the top of the agenda-as in the United States and other Euro­pean coun­tries.

“You ig­nore the dis­tri­bu­tion of in­come at your peril,” said John Llewellyn, a for­mer global chief econ­o­mist at Lehman Broth­ers who now runs a con­sul­tancy, Llewellyn Con­sult­ing and is on the ad­vi­sory panel of Bri­tain’s in­de­pen­dent bud­get of­fice.

“It doesn’t af­fect po­lit­i­cal out­comes one year to the next. But, as we have seen, it can pro­duce very big out­comes. It cre­ates a sense of in­jus­tice and we know that al­ways ul­ti­mately bites hard,” he said.

Trump’s vic­tory in the US pres­i­den­tial elec­tion on Nov 8 was an il­lus­tra­tion of what can hap­pen when vot­ers lose faith in their politi­cians and feel left out. A po­lit­i­cal novice who has not held elected of­fice, Trump rode a wave of anger to­wards Wash­ing­ton in­sid­ers, promis­ing to cre­ate jobs, re­vive the econ­omy and “make Amer­ica great again”. Ham­mond, who was for­eign min­is­ter un­der the pre­vi­ous prime min­is­ter, David Cameron, will have taken note.

A TEST FOR THE GOV­ERN­MENT

Ham­mond has no short­age of pri­or­i­ties af­ter the vote to quit the EU, which has in­creased eco­nomic un­cer­tainty in Bri­tain though May has yet to launch the for­mal process for leav­ing the 28-na­tion bloc. She says she will do so by the end of March. The im­me­di­ate im­pact of the Brexit vote has not been as se­vere as many economists warned. But in­fla­tion is likely to rise to around 3 per­cent or more next year, out­pac­ing growth in pay, be­cause the pound has slumped since the June 23 ref­er­en­dum. The Bank of Eng­land ex­pects eco­nomic growth in 2017 and 2018 of 1.4 and 1.5 per­cent re­spec­tively, half the av­er­age pace of the 10 years be­fore the global fi­nan­cial cri­sis.

But May has made help­ing the “just man­ag­ing” fam­i­lies a top pri­or­ity, and Ham­mond’s speech will be used by op­po­nents, vot­ers and in­ter­est groups to gauge her com­mit­ment to her prom­ises.

“While the choices are hard, what ap­pears clear is that the Chan­cel­lor does have op­tions: the ex­tent to which he utilises them will go a long way to de­ter­min­ing just how se­ri­ous the gov­ern­ment’s fo­cus on the ‘just man­ag­ing’ is,” the Res­o­lu­tion Foun­da­tion, a think tank which works on is­sues fac­ing lower-earn­ing house­holds, said in a report this month. The main way that Ham­mond’s pre­de­ces­sor as fi­nance min­is­ter, Ge­orge Os­borne, tried to help house­holds cope with slow earn­ings growth was to in­crease the thresh­old at which work­ers start to pay in­come tax, and to raise the min­i­mum wage.

James Dowling, a for­mer Bri­tish Trea­sury of­fi­cial who worked on bud­gets, said Ham­mond might be tempted to accelerate the pace of rais­ing the thresh­old for pay­ing in­come tax.

“I can see how that would fit into the nar­ra­tive,” Dowling, who is now head of pub­lic pol­icy at con­sul­tancy Lan­sons, said. A less ex­pen­sive al­ter­na­tive would be to cut fuel duty or “sin taxes” on beer, wine, spir­its and to­bacco, some­thing the gov­ern­ment could do im­me­di­ately with­out hav­ing to wait for the new fi­nan­cial year to start in April, he said.

The Res­o­lu­tion Foun­da­tion urged Ham­mond to take a more tar­geted ap­proach by re­vers­ing planned cuts to so­cial se­cu­rity ben­e­fits for peo­ple who are in work but on low wages.

Os­borne last year re­stricted ac­cess to Bri­tain’s ex­pen­sive tax cred­its sys­tem, which tops up the earn­ings of work­ers on low in­comes, and froze work­ing-age ben­e­fits for four years in 2015. Along with the ef­fects of a weaker econ­omy and the higher in­fla­tion that is likely af­ter the pound’s slump, the changes mean the in­comes of the poor­est two-fifths of house­holds could shrink be­tween now and 2020, the Res­o­lu­tion Foun­da­tion said.

To help pay for eas­ing prob­lems of those in low-paid jobs, Ham­mond could freeze the 2017 rise in the in­come tax al­lowance thresh­old-the ben­e­fits of which will go mostly to higher earn­ers-and drop a plan to cut cor­po­ra­tion tax, it said. Look­ing fur­ther ahead, Bri­tain’s new gov­ern­ment could re­think the way it raises state pen­sions each year-some­thing rec­om­mended this month by law­mak­ers-and take bolder ac­tion to try to ad­dress one of the big­gest squeezes on fam­i­lies, the high cost of buy­ing or rent­ing a home.

Bri­tain launched a 5 bil­lion pound ($6.30 bil­lion)home­build­ing stim­u­lus pack­age last month, its lat­est at­tempt to ad­dress a chronic hous­ing short­age. But Vince Ca­ble, who served as business min­is­ter in the coali­tion gov­ern­ment of 2010-2015 when he was a Lib­eral Demo­crat law­maker, said the scale of the prob­lem re­quired an over­haul of Bri­tain’s tax­a­tion sys­tem which, he said, favours home-own­ers.

But rad­i­cal change would be so un­pop­u­lar with many vot­ers, it could end the po­lit­i­cal ca­reer of any fi­nance min­is­ter who tried it, Ca­ble told a panel dis­cus­sion on Ham­mond’s tax op­tions or­gan­ised by the Res­o­lu­tion Foun­da­tion. “You’d need to be pro­tected by a mil­i­tary gov­ern­ment,” he said. — Reuters

GWADAR: A Pak­istan Navy ship berth at Gwadar port, about 700 kilo­me­ters (435 miles) west of Karachi, Pak­istan. Pak­istan’s top civil­ian and mil­i­tary lead­ers trav­eled to the country’s south­west yes­ter­day to open a new in­ter­na­tional trade route by see­ing off a Chi­nese ship that’s ex­port­ing goods to the Mid­dle East and Africa from the newly built Gwadar port. — AP

NREC CEO Sa­muel Sidiqi

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