Budget will offer no spending sprees but hints of a post-Brexit UK
IT'S all-change again tomorrow as Chancellor Philip Hammond delivers his first (and last) spring budget announcement in preparation for the move to future autumn budgets and spring statements.
It also comes as the Prime Minister prepares to invoke Article 50, starting the two-year process to prepare the UK to exit the European Union. And, in preparation for that, according to the Chancellor, there will be “no spending sprees” as the country needs to "get back to living within our means" and “reduce its borrowing.”
The Budget may also give something of a flavour of the Government's vision for post a Brexit UK. The recent Industrial Strategy paper and its “10 pillars” emphasised a broad approach to creating the conditions within which businesses of all sizes and across all sectors could thrive and also gave some clues as to priorities on the industries and services of the future.
It's also worth noting that, a couple of days after the publication of the Industrial Strategy paper, the Department for the Economy at Stormont launched consultation on ‘Economy 2030', with “5 pillars” to transform Northern Ireland into a “globally competitive economy that works for everyone.” So, watch out for any similarities.
While there is almost no mention of tax in the Industrial Strategy paper, tax policy will nonetheless be crucial in helping achieve the stated objectives, such as helping businesses to scale-up, invest in plant and in R&D and innovation. So we can expect to hear more on the public spending and the tax measures to underpin his plan.
What happened in the Autumn Statement?
In the Autumn Statement the Chancellor announced some tax cuts, including raising the income tax personal allowance and higher rate threshold, cutting the rate of corporation tax and reforms to the inheritance tax system. It also gave Northern Ireland an additional £250m between 2016-17 and 2020-21.
PwC Northern Ireland partner David Armstrong said: “This was a result of the Barnett Formula distribution and was largely due to the Executive's ‘share' of an extra £1.3bn of road and infrastructure spending in England.
“To put that extra £50m extra per annum into context, total Departmental spending in Northern Ireland is around £11 billion annually- so £250m of new money amounted to about 0.5 per cent of annual spending.
“One other outworking of the Autumn Statement was increasing the National Living Wage to £7.50, and bringing another group of workers into the National Living Wage regime. But, as thousands more workers come under the National Living Wage every time it is increased it does leave local business with a hidden challenge as, from 2018 on, employers face a 50 pence a year increase to reach the government's £9/hour target by the end of this parliament.
“That will mean a hefty increase in many company wage bills, so anything in the Budget that increases the cost of employment or of doing business will not be welcome in Northern Ireland."
Northern Ireland – political context
Last week's Assembly election, may have changed the political make-up of any new Assembly, but it doesn't change the issues, or narrow the gap that separates the main parties. An inability to form a new Executive will impact on an agreed budget, the draft Programme for Government and progress towards reducing the rate of corporation tax in 2018. And that's before we deal with an impending Brexit.
Paul Terrington, PwC's regional chairman in Northern Ireland said: "There is a political consensus towards the goals of rebalancing the economy, creating 50,000 new jobs and reducing the level of corporation tax. And, if we add developing a strategy that will deliver prosperity to a post-Brexit Northern Ireland, there is a political mountain to climb.
“In terms of economic growth, Northern Ireland is already the poorest-performing region in the UK. So, the political parties must focus on creating a functioning Assembly and an Executive that is committed to partnership, prosperity and building a new consensus. This may require hard choices but, as we await Article 50 and the negotiations to leave the EU, the status-quo is not an option.”
Northern Ireland – economic context
While the region's employment has returned to pre-crisis levels, the north's output, as at 2016 quarter three, remains 6.2 per cent below the pre-crisis peak, suggesting that employment might be going up but productivity is not keeping pace. And that lack lustre productivity is reflected in a lack of wealth creation and lower than average wages across the UK.
Northern Ireland probably delivered gross value added (GVA) growth of 1.4 per cent in 2016, an upward revision of PwC's previous forecast, reflecting the resilience shown by the local and wider UK economy in the wake of the EU referendum.
However, this figure still falls below the PwC estimate of 1.6 per cent growth in 2015 and represents a slowdown in economic growth. Once again, Northern Ireland remains the poorest performing of the 12 UK regions in terms of GVA growth.
In addition, rising import prices and higher wage pressures are a concern and retailers are starting to pass the increase in costs onto consumers. PwC expects this to continue throughout 2017 and forecasts that inflation could reach 3 per cent by the end of 2017.
A combination of rising prices, inflation and a slowdown in employment growth could impact consumer spending, a key driver of growth over the past year. Consequently, PwC's latest forecast is for NI growth of around 0.6 per cent in 2017.
The prospects for business taxation
To ensure that it thrives outside the EU, the UK must play to its strengths. These include the attractiveness of the business, legal, and regulatory environment and there have been hints from Government that tax competition could step up depending on Brexit negotiations.
Martin Cowie, PwC partner and head of assurance, private business in Belfast said that, with Northern Ireland hoping to reduce corporation tax to 12.5 per cent in 2018, further cuts to the UK national rate would further dilute the effect of a lower NI rate.
He said: “We don't expect any announcements on Wednesdays to lower the corporation tax rate beyond the 17 per cent already announced. But the Chancellor could accelerate the cut so that would be in place before 2020. He may also hint about further moves to increase the UK's tax competitiveness as a pre-Brexit negotiations teaser.
“We also believe he may look towards further help for SMEs and, with three-quarter of local companies family-owned or owner-managed, that would be welcome. One approach could be to reinstate the distinction between the main rate of tax applied to big and small businesses, although he may hold back on firm commitments to such measures until after the Summer - remembering he has another chance to make changes in the Autumn budget.”
With continued pressure on available and affordable housing, the Government may look to introduce further measures to encourage older home-owners to downsize. He could further reform inheritance tax with an even more generous regime for homes that are passed down or sold in lifetime and potentially some other tax measures that might tip the decision for down-sizers towards selling.
Northern Ireland partner and head of tax, private business, Janette Jones, said: “Healthcare has rarely been out of the headlines in another tough winter for the NHS. Past Governments have ploughed extra funding into the NHS via national insurance rises, and we may well see this approach again.
“There has been a lot of attention around the disparity of tax treatment for workers who are self-employed and those who are not. This is a big topic affecting not just the tax take but also the availability of skills and talent. An announcement from the Chancellor to review this area and the policy needs would reflect a measured response from Government.
“As a wild card prediction, Government hints about post Brexit UK being a lower-taxed economy might indicate a cut to personal tax. A penny from the basic rate would be eye catching and popular, but very expensive. The Government is more likely to continue the policy of hiking the personal allowance and basic rate band upwards, but don't completely rule out a rate cut, or a nod to a rate cut next year if certain economic targets are met."