News
14 Nov 2016 04:56pm

What to expect from the upcoming Autumn Statement

After dropping predecessor George Osborne’s plans to cut corporation tax, the current chancellor Philip Hammond has told cabinet ministers to expect a modest fiscal stimulus in this year’s Autumn Statement, while also promising to invest in homes and transport. With business groups and firms having already outlined their wishes, what can we hope to expect from the upcoming announcement?

/-/media/economia/images/thumbnail-images/800philiphammondthumbnail.ashx
Caption: Tax, Brexit and infrastructure take centre stage for Philip Hammond

ECONOMY

The chancellor is expected to announce a sizeable expansion in investment plans, funded by new borrowing, according to Dods. The parliamentary information group said that policies such as the government’s decision to go ahead with Heathrow expansion and the £5bn boost in housing imply that the chancellor is willing to pursue an investment plan.

Hammond has also already reiterated that plans to achieve a budget surplus by 2020 have been abandoned.

Anyone looking for a dramatic, Keynesian-style revolution in fiscal policy will be disappointed

Ian Stewart, Deloitte’s chief UK economist,

His predecessor George Osborne scrapped the target after the EU referendum result, arguing that the UK had to be “realistic” about the likelihood of achieving the target given the referendum result and the expected “significant negative shock for the British economy”.

Meanwhile, the latest forecasts from the Office for Budget Responsibility (OBR) have already been submitted to the chancellor. They will be the first OBR figures since the EU vote and will be unveiled during his speech.

A Resolution Foundation report has indicated that Hammond has a large “shopping list” of possible policy ideas, including higher public investment, the reversal of planned cuts to Universal Credit and the maintenance of the Conservative’s manifesto promise to not increase income tax for the duration of the current Parliament.

However, the think tank warned that Hammond could face a borrowing black hole of £84bn over the next five years, leading to a £13bn deficit by 2020, instead of the previous forecasted £10bn surplus. It added that the annual deterioration could reach £23bn in 2019-20.

Ross Campbell, ICAEW’s public sector director, said that, while Hammond is expected not to stick to Osborne’s targets, he will want to keep his party's manifesto commitments.

Campbell expects some news on corporation tax, as part of a strategy by the government to ensure that the UK remains a good place in which to do business following Brexit.

Ian Stewart, Deloitte’s chief UK economist, expects this Autumn Statement to be “short on the eye-catching surprises beloved of Hammond’s predecessor”, and warned the chancellor is likely to push the deadline for eliminating the deficit “well into the next Parliament”.

He said that this would give him more scope to lean against economic weakness by boosting spending, particularly through targeted increases in spending on infrastructure and housing.

However, he warned, “Anyone looking for a dramatic, Keynesian-style revolution in fiscal policy will be disappointed. The destination, eliminating the budget deficit, will be unchanged but Hammond is likely to say that, in the post-referendum world, it is prudent to take longer to get there.”

Stewart said he will be “watching closely” to see how Brexit has altered the Office of Budget Responsibility’s view of Britain’s long term economic prospects.

“My hunch is that they will forecast that most of the knock to growth will happen in the next couple of years, with growth towards the end of this Parliament running marginally lower than previously expected.”

David Brookes, tax partner at BDO, said, “Hammond faces a difficult balancing act. On one hand he does not want to be seen as abandoning all financial prudence now that the focus is away from reducing the deficit, but he will want to strike a different tone to Osborne and follow the new party message that the economy can 'work for all'."

TAX

Hammond has previously announced he would not cut corporation tax to 15%. Instead, he has told European counterparts that he would cut the rate to 17% by 2020.

Bill Dodwell, head of tax policy at Deloitte, says it is likely that the Autumn Statement will see no tax reductions or spending increases, and that Hammond's first task will "naturally be economic".

However, he added that "business and individuals will look for updates – and hopefully changes – to two current areas. These are ‘Making Tax Digital’ and, for companies, proposed restrictions on the use of losses and interest expense".

I would welcome one fiscal event a year. The time spent preparing two big fiscal events can be absorbing

Ross Campbell, ICAEW public sector director

After analysing HMRC consultations, Treasury statements and other announcements, RSM has identified “almost 30 tax measures which we are confident will feature in the statement”. These measures are expected to affect companies, employers and private individuals.

However, as many tax reliefs would have to go through EU state aid approval processes, and with Brexit negotiations in mind, the chancellor may decide that now is not the right time to introduce more UK tax breaks, BDO predicted.

The mid-tier firm expects Hammond to focus on tax simplification to "help make the UK a more attractive place to do business" and to "relieve business owners of the administrative burden that is holding back growth".

The Times has also reported that the chancellor is expected to unveil billions of pounds worth of middle-class tax cuts, at the same time as warning that uncertainty will last for several years following the EU referendum result.

During the weekend, 53 Tory MPs urged Hammond to cut fuel duty in this month’s fiscal event, as they claim consumers and businesses are being “ripped off”.

In a letter send to Hammond, the MPs, six of them members of the government, said the recent drop in wholesale prices has not benefited consumers.

MAKING TAX DIGITAL

The chancellor is also expected to give an update regarding HMRC’s Making Tax Digital plan, which is estimated to cost £1.3bn. However, HMRC has also projected that the changes will help to reduce the tax gap and contribute £945m to the exchequer by 2020.

Patricia Mock, personal tax expert at Deloitte, said, “We think that requirements for accounting software should not be mandated for several years. This is a huge change for 5.4 million small businesses and 1.5 million landlords and will add to their costs, as they have to buy new systems and potentially engage professional help.

She said that it is “highly unlikely” everything could possibly be in place for 2018.

“We hope that the chancellor will acknowledge that changes are needed to a project of this scale – and say as much at the Autumn Statement. We would like to see a road-map from HMRC, acknowledging that information providers will need several years to prepare.”

PUBLIC SECTOR

According to Deloitte, Britons are expected to continue experiencing a tightening of day-to-day budgets, but the government will allocate “much more money for building and infrastructure projects”.

Rebecca George, UK public sector leader at Deloitte, said, “What we’d hope to see as well is some recognition that big transformation programmes – like getting public bodies to use digital technology more effectively – need to continue.”

INFRASTRUCTURE

Many businesses and organisations have urged the government to focus this Autumn Statement on infrastructure, and it is expected that the chancellor will unlock extra funding for such projects.

Nick Prior, global head of infrastructure at Deloitte said, “Hammond should focus on the smaller, ‘shovel ready’ projects - roads, rail improvements, social housing and schools – where money can be put to immediate use and we can see a much faster return on investment.”

Indeed, Hammond signalled during the Conservative conference in October that he would focus on smaller projects such as rail and road repairs.

I expect the Chancellor will keep his powder dry

BDO tax partner David Brookes

He said, “Our stock of public infrastructure – like our roads, railways and flood defences – languishes near the bottom of the developed-countries’ league table after decades of under-investment.

"And our businesses, too, are not investing enough. All of this must change to build an economy that works for everyone. We need to close that gap with careful, targeted public investment in high value infrastructure… and encouragement of more private investment in British businesses.”

Meanwhile, ICAEW’s public sector director Ross Campbell also said he expects Hammond to announce an increase in spending as part of a national infrastructure plan.

BDO said that more detail of Hammond’s £1.9bn cyber security plan will also feature in the speech.

"This is the perfect type of investment for the chancellor; there’s no EU issue and the money has already been committed," Brookes said.

EU FUNDING

The prime minister Theresa May has previously said that all EU funded projects that were signed before the Autumn Statement would continue to be fully funded even after Brexit.

As a result, it is expected that Hammond will outline arrangements on whether to guarantee funding for any projects after that time during the Autumn Statement.

In the meantime, there has been a slowdown in applications for EU funding due to the uncertainty around the future of funding for EU projects, The Federation of Small Businesses has warned.

HEALTH

According to the Guardian, Theresa May has said there will be no extra funding for NHS in this month’s announcement, but Dods argues that, thanks to pressure from the health select committee and other organisations, there could be a cash boost announcement.

The Resolution Foundation said that the Autumn Statement will be “more like a post-election emergency Budget” which will set the government’s economic objectives for the remainder of Parliament, rather than a big event with a number of new measures.

Blick Rothenberg also noted that the chancellor has been “considerably less vocal than his predecessor” in the weeks running up to the Autumn Statement, which could hint to a move to a more “quiet” announcement.

Ross Campbell, ICAEW’s public sector director said that Hammond is expected to reduce the political emphasis on the Autumn Statement, and that it could be dispensed all together in the future.

“I would welcome one fiscal event a year,” he said. “The time spent preparing two big fiscal events can be absorbing. Moving to one event a year would free up resources. We would benefit if there was more time for policies to be better worked out.”

Meanwhile, BDO tax partner David Brookes said, "Over the next few years, there will inevitably be bumps in the road as we look to leave the EU. Because of this, I expect the Chancellor will keep his powder dry. He will have plans up his sleeve but he’ll want to keep them to himself for now, giving the government headroom to respond and support the economy should a downturn come along."

Jessica Fino

 

Related articles

Autumn Statement date announced

Business welcomes Hammond's ditching of deficit plan

Chancellor could face £84bn borrowing black hole following Brexit vote

Osborne ditches surplus target in light of EU exit

Topics