Britain’s big Budget battle
ThE upcoming Budget on October 29 will be framed by two events. The first is an increasingly fraught global economy. And the second a better outcome to Brexit negotiations than thought possible only a few weeks ago.
No one could be leaving the tropical sun of Bali without a sense of foreboding about what lies ahead for the global economy. Output has plateaued after reaching a postcrisis peak of 3.7pc last year and the Chancellor Philip hammond and governor of the Bank of England Mark Carney have been directly exposed here to economic and market events which could wreak havoc.
There is increasing alarm over Donald Trump’s tax cut policy. Corporate tax cuts that are described as supply side are not seen as generating long-term benefits for the global economy. instead they are viewed by Trump critics as adding to America’s already substantial budget deficit. The short-term boost to Us growth is seen as likely to push up interest rates beyond where was expected when the Federal Reserve began its tightening under Janet Yellen.
in Jay Powell the Fed has a mainstream, cautious Republican who believes in sound money. The sharp difference of view with the ‘gung-ho growth’ White house could see the Us’s key interest rate jump from 2.5pc faster than expected which will continue to exacerbate problems around the world.
Capital flows from the Us to the rest of the world are drying up as better and safer returns are offered in the Us. Capital flight from emerging markets since the spring has reached $35bn and that was before the Us raised rates to current levels, and indicated more rate rises to come.
At 250pc of total output, the $167trillion debt of more sophisticated economies is at alarming levels. Ladle on top of this the Us versus China standoff on trade and there you have a precarious position.
REMARKABLY, given the torrent of negativity about Brexit, hammond may soon have better domestic cards to play. The UK Government’s gross debt may still be at 87.4pc of output but it is gradually falling and the deficit is sharply down. As he puts the final touches to his Budget later this month and a spring public spending review, hammond could potentially have up to a £30bn Brexit bonus to spend as the country moves from austerity to stimulus, especially for the Nhs and housing market.
hammond may be obliged to fulfil Prime Minister Theresa May’s pledge to bring an end to austerity but he does not appear in the mood to declare the goal of a balanced budget to be at an end.
That means more fiddling with the tax system. The historic assault on pensions looks as if it will continue. Claims that too large a proportion of tax relief goes to the better off assumes that people in lower rate tax bands are without aspiration and do not move up the income scale. The tax break on pensions may look ‘eye-watering’ but it is not free money. Citizens pay income tax on that cash, often at higher rates.
Pension saving is hugely important. The IMF’s balance sheet or net worth table for Britain shows it to be the second weakest among a universe of some 31 countries. Among the reasons is the burden of unfunded pensions which is a big liability for the Government.
The Treasury has long been a sceptic on tax breaks but coming down heavily on the savings culture should not be an option for eliminating the deficit. There is still time for hammond to reverse a bad policy.