Spreadsheet Phil's Spreadsheet of Doom
The autumn budget presented by the British Chancellor of the Exchequer, Mr. Philip Hammond provides few solutions for Britain which is plagued by significant economic problems and bad fiscal policy adopted by Mr. Hammond's predecessors. Mr. Hammond's budget is un-innovative and still unduly forceful on austerity. It lacks vision and does not do much to help the economy prepare for Brexit. Alongside that, the budget provides grim predictions made by the Office of Budget Responsibility(OBR) on the economy's future. And Mr. Hammond does precious little to act on these predictions in order to make an attempt at stimulating the economy.
The budget contains quite a few significantly downgraded predictions on the UK economy made by the OBR. The OBR’s real GDP forecast for the current financial year has been downgraded to 1.5%, down from the 2% prediction in March. Further, the OBR has also drastically downgraded its predictions for the forthcoming years, forecasting 1.4% growth next financial year, 1.3% in 2019-20 with a slight uptick to 1.5% in 2020-21. In addition to this, the OBR also provides worrying forecasts on slowing productivity―which can be one of the main causes of economic slowdowns. Potential Productivity Growth, the additional amount the OBR assumes an average worker can increase his or her output for each hour worked, is expected to fall from 1.8% to 1% in 2020. In fact, the medium-term and long-term average productivity growth forecasts of the OBR are 1.2% a year and a slightly higher 1.5% a year, respectively. It is indeed true that these predictions are more optimistic than those released in March but they still provide little to cheer.
Unfortunately (or maybe not surprisingly), Mr. Hammond's budget lacks much substance and resolve in dealing with these dismal figures. Mr. Hammond has planned to spend around £10.4 billion over the next five years on productivity growth. This is a small amount, given the magnitude of the problem. Of this £10.4 billion, around £7 billion is going to be allocated to the productivity investment fund. However, on what exactly will this £7 billion be spent via the fund is ominously unspecified (or foolishly so). The budget seeks to increase private and public investment in R&D from the current 1.7% of the national income to 2.4%(which is the average for OECD economies) by 2027. It also seeks to encourage and fund workforce skill development measures such as in-work retraining schemes for adults and funding of doctoral research on AI whilst proposing to increase skilled migration to the UK. While these goals or proposals are prudent to an extent, they do deserve much criticism.
The investment target wants a small 0.7% increase in investment spending of both public and private sectors as a percentage of the national income in a decade. The extent to which this is unambitious should be self-evident, considering the grim forecasts of the OBR. The effectiveness of encouraging skill development in the short-term can be greatly doubted. It simply takes quite a lot of time to increase the skill-set of a vast number of workers and then increase productivity using more skilled workers. Even the £1.7 billion outlay for local transport priorities is not enough to boost productivity. The UK dropped nine places in the world’s quality of infrastructure rankings last year and it needs a stronger push on infrastructure development to expand economic activity and productivity.
Going forward, Mr. Hammond's budget fails to solve the issue of exorbitant house prices. The budget exempts stamp duty on first-time buyers for houses up to £300,000 and outlays £44 billion for the construction of 300,000 new homes. This is toothless in dealing with root of the problem: housing shortages. An addition of 300,000 homes over a five year period is far from large. The much-touted stamp duty exemption will induce greater demand in a market with an existing shortage thereby increasing rather than decreasing house prices―bringing only marginal benefit to home-buyers. Further, the stamp duty exemption has a projected cost of £560 million. This money would have been much more efficiently used if it were added to the £1.5 billion allocated (a portion of the total £44 billion) for loans to small builders in order to kick-start construction, instead of being used in the form of potentially harmful tax exemptions. The only mildly praiseworthy measure seems to be the doubling of council tax on empty properties held by second home buyers which seeks to increase home availability. But, again, this is a minor fix when the thing that the economy actually needs is the construction of more houses.
This budget is extremely un-receptive to the fact that businesses need a good tax policy to weather and prosper in a post-Brexit UK. The budget does next to nothing to reduce taxes on small businesses, which are especially vulnerable in the UK economy due to the uncertainty of Brexit. Mr. Hammond declines to raise the exemption on VAT(Value Added Tax) from the £85,000 turnover threshold in the present budget. A reduction in VAT, whether through exemptions or rate decrease, especially on small businesses, would have helped tame inflation and nudge productivity higher. It would have been far better a measure for raising productivity than Mr. Hammond's otherwise good push for further skill development.
Mr. Hammond's budget does not put forward any cuts to corporate tax. London―a financial and business hub of the world and a generator of around 22% of the UK's GDP is jittery due to Brexit. A corporate tax reduction would have brought much relief to London banks and firms at this point. It would have likely increased the profit margins of Britain's services sector, helping it retain workers through Brexit whilst also potentially attracting more investment and business post-Brexit.
The budget puts forward a diesel car levy which is an honourable move due to environmental concerns but is ultimately imprudent and even hypocritical, given the freeze on fuel duty. A levy on diesel cars could discourage people buying them at a time when sales have fallen 30% in October compared to last year. This would end up affecting many British industries such as steel which already face productivity concerns amid a grim economic outlook. What makes this move even more ill-advised is the OBR’s assessment that this measure will not raise as much revenue as the government expects―a clear indication that Mr. Hammond's financial wisdom is quite bankrupt.
Finally, Mr. Hammond goes on to remove capital gains tax reliefs for foreign property buyers. Driving away rising foreign investment from Britain's property markets (especially London's), which was partly induced by the post-Brexit depreciation of the pound sterling.
One of the few good things about the budget is that it rations £3 billion for “Brexit contingency plans” in case there is a 'no-deal' situation. However, on what exactly this £3 billion is going to spent is anybody's guess and it is unknown as to how this might help face a 'cliff-edge' Brexit. After all, Mr. Hammond's budgetary tokenism is just like his sense of humour―half-hearted and ineffectual.
The final area where the budget seems to provide only slightly better solutions relates to Britain's public services. The chancellor has allocated £2.8 billion for the National Health Service (England's universal public healthcare service) for the next three years and reduced waiting times for universal credit. While these measures are welcome, they are in no way substantial. The amount given to the NHS is less than half the amount appealed for by the cash-strapped, overburdened and inefficient entity. The reduction in waiting times for universal credit benefit payments by seven days is similarly ineffectual. A seven day reduction of the waiting period to five weeks will still punish those who do not have two pennies to rub together. Moreover, reduced waiting periods will not bring much relief to the impoverished since universal credit has been an ineffective program from the start. Around one in twenty people did not receive benefits even after ten weeks under universal credit and new claimants to universal credit have fallen into arrears in the past many-a-times, indicating how the programme really provides little help to the impoverished. No wonder The Economist once stated that a pause in the rollout of universal credit “would be a victory for economic logic and common sense."
In the end, it appears that Mr. Hammond's lack-lustre fiscal arithmetic and unwillingness to relax austerity in the face of economic challenges will hurt the economy. “Spreadsheet Phil” (as the chancellor is called for being an insufferable bore) carries spreadsheets of the OBR’s doomsday forecasts in the autumn Budget, accompanied by an unintelligent and nonoptimal allocation of resources, harmful or ineffective tax measures and a dull speech with woeful attempts at humour.
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