Philip Hammond weighs options for spring statement spending

On Wednesday, MPs expect to hear the chancellor tell them that austerity will soon be consigned to history. Philip Hammond said in last year’s budget that “austerity is coming to an end” and teased ministers with the promise of the cash that he and his predecessor George Osborne denied them in the previous eight years.

There is a huge gap to fill just to prevent further austerity taking effect. According to the Institute for Fiscal Studies, the chancellor’s pledge in October to boost NHS spending, defence and international aid failed to safeguard councils and some of the worst-hit government departments from further shortfalls.

The thinktank said a minimum of £2.2bn would be needed to freeze all budgets and protect them from inflation, and ministers would need to find an extra £5bn to allow departments to maintain services in line with the UK’s rising population.

If Brexit wasn’t keeping most spending plans on hold, Hammond would have cash to spend in the spring statement. The annual budget deficit is likely to be well below his 2% target in this financial year, at 1.3% of GDP, the lowest since 2003. Looking ahead, the Office for Budget Responsibility (OBR), the Treasury’s independent forecaster, handed him a £74bn windfall over five years at the last budget.

But it is not all plain sailing for the Treasury. Here are the debits and credits on Hammond’s ledger.

Hammond’s winners

Tax/debt interest Through most of the UK’s recovery from the financial crash, income tax receipts have grown at a stubbornly low rate. Not so in the last year: income tax receipts are up 8% between April 2018 and January 2019 compared with the same period in the previous year. The reason, says the Resolution Foundation thinktank, is steep pay increases for those in the top 20% income bracket.

Over the same nine months, capital gains receipts have jumped 21%, again due to revenues from the UK’s richest households. VAT, which mostly applies to non-essential items, is up 5%. And borrowing costs have fallen as the costs of issuing index-linked bonds tumbles in line with the RPI measure of inflation.

Benefit cuts A freeze on benefit payments is set to cost couples with children in the bottom half of the income distribution £200 a year on average, saving the exchequer £1.5bn, according to the Resolution Foundation. A clampdown on other benefits will save around £3bn. From April, the cut in the value of working-age benefits will be 6.1% in real terms over four years. “The impact for many families will be larger still because of simultaneous cuts in entitlements,” says Matthew Whittaker, chief economist at the Resolution Foundation.

Departmental spending Civil servants tend to overreact in times of austerity and the figures bear this out. Between 2013-14 and 2017-18, the average annual net underspend relative to government plans was £2.5bn on day-to-day spending and £1.3bn on capital spending.

In this financial year, the underspend forecast by the OBR is £2.2bn on day-to-day spending and £2.2bn on capital spending.

Hammond’s losers

Economic growth The manufacturing sector is in recession and investment dropped by 3.7% in the last year. A further drag on growth comes from across the channel where the UK’s main trading partners in the eurozone are undergoing a dramatic slowdown.

The OBR is likely to announce a U-turn after raising its GDP growth forecast for 2019 to 1.6% in October. It will probably mark down GDP growth to the level predicted by the Bank of England – 1.2%. Without strong growth over the next couple of years, the OBR will be forced to downgrade future tax revenues and increase the projected annual deficit.

Stamp duty After the first nine months of the year, stamp duty on house sales is down 6.3%. In October, the OBR said it saw a fall coming: it predicted the chancellor would only receive £12.8bn in 2018-19 – £800m lower than the year before. While a general shortage of homes has kept prices from falling, the number of properties bought and sold above the stamp duty threshold of £300,000 for first-time buyers – who make up a majority of home purchasers – has fallen. Receipts in January were around £100m lower compared with the same month last year.

Corporation tax An analysis based on HMRC data rather than any sophisticated modelling suggests the Treasury sacrificed £2.4bn in revenues when it cut the headline rate of corporation tax from 20% to 19% in 2017. This year, receipts are up 7%, but the total gain could be so much more. A further two-percentage-point cut – from 19% to 17% – that Hammond plans to take effect by the financial year 2020-21 will take the annual loss to £8bn, says the Resolution Foundation.


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