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In 2017/18, UK government revenue is forecast
to be £744 billion while government spending is
forecast to be £802 billion
1
. That ‘budget deficit’
is funded by new borrowing.
Similarly, every year – or in recent times, twice
each year – the chancellor of the exchequer
stands at the government despatch box in the
House of Commons to deliver his Budget
address and set out his economic course for the
next year and beyond. Typically, this will begin
with an upbeat assessment of the UK’s past,
present and predicted future economic
performance. Then, in the theatrical part that
follows, a series of tax changes is announced
which usually amounts to a billion (or less)
here and a billion there. You do not need
a degree in mathematics to work out that the
sum total of the address, delivered with such
fanfare, rarely adds up to a hill of beans in the
context of the overall economic picture. This
year was no exception.
The importance of a Budget comes not from
tinkering with the overall tax burden, but rather
from the tone it sets. This is partly because
seasoned observers feel they can tell from
the chancellor’s demeanour and body language
where he sits in the spectrum from genuinely
excited to seriously concerned about the
country’s economic prospects. An apparently
confident chancellor can have a positive effect
on business sentiment.
Philosophy is important, too. The Budget
speech is one of those few set piece
parliamentary occasions when politicians know
that a fair slice of the country and the media will
be listening and have the chance to turn words
into deeds, reminding their voters why it was
they elected them.
This, along with claims of breach of a manifesto
pledge, is why Chancellor Philip Hammond was
criticised so scathingly the morning after he had
delivered the Budget, once his content was
analysed. He had looked good in the first half,
proclaiming the continuation of growth despite the
manifest uncertainties surrounding Brexit. But he
ran into big trouble with his plan to increase tax on
the key business constituency of the self-employed
via higher Class 4 National Insurance contributions
(NICs). He compounded that error by slashing the
ceiling for tax-free dividends from £5,000 to
£2,000. The NICs step was unlikely to be popular
and, since it would not even have raised much
money, largely pointless too. Above all, it was not
what people expected from a Tory chancellor. And,
in the words of the Scottish Nationalists’ Angus
Robertson, an ‘embarrassing, screeching U-turn’
was swiftly forced on the government. The dramatic
episode does serve to underline how the UK’s tax
base is being eroded by the shift to self-employment
and how little scope the chancellor has to raise
taxes thanks to the manifesto commitments of
David Cameron’s government.
For the small investor, however, the absence of
changes to the Capital Gains Tax and estate duty
regimes was just as important. Putting the Budget
behind us, trends to watch in the next few
months are the path of sterling and the
resurgence of inflation. Will Brexit impact on
market volatility or lead to economic slowdown?
How will the elections in France, Germany and
other key European Union countries unfold over
the rest of the year? Looking further afield, what
impact will US President Donald Trump have on
markets, and how will they react to higher US
interest rates? Those issues are well beyond the
ability of a UK chancellor of any stripe to control.
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Getty Images. Source: 1 parliament.uk, March 2017
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The importance of
a Budget comes not from
tinkeringwith the overall
tax burden, but rather
from the tone it sets