On 22nd November, Philip Hammond, the Chancellor of the Exchequer, will deliver his 2nd Budget Statement this year.
The last Budget in March was a balanced statement with the Chancellor opting to keep his fiscal headroom, rather than go on a pre-emptive Brexit containment splurge.
This restraint was also driven in part by his predecessor’s pre-referendum fiscal rules around which taxes could and couldn’t be increased.
A lot has changed since the last Budget was delivered
Largely as a result of these fiscal rules (chief among them a promise not to increase NICs, which was ignored by the Chancellor in the March Budget, only to see him U-turn following backbench uproar) the Prime Minister, Theresa May, did her own U-turn and announced a General election for June (we shared some thoughts at the time about what political parties needed to be doing to enable manufacturing investment).
The result was a loss of her majority and a new reliance on the DUP to carry a majority.
On the economic front the news has been equally up and down. Martyn covered this in a recent blog with some graphs but the key headlines are:
- Inflation, which was already on the rise following Sterling’s depreciation, continued to rise
- Manufacturing bounced back after a slow start to the year, off the back of a global upswing in demand
- Negative real wage growth increased
Alongside that, while UK growth has remained steady, we’ve gone from 2nd fastest to last for growth across the G7. Francesco covered the latest GDP figures in a recent blog - other G7 countries are moving more strongly in a positive direction.
And to top all of that off, productivity across the economy is only just hovering around the pre-recession peak. The Bank of England confirmed it last week - a downgrade in future productivity growth is also expected by the OBR at this Budget.
No pressure Chancellor
However, the biggest change since the last Budget was the triggering of Article 50 at the end of March, kick-starting the two year negotiation period for Brexit.
The implications of that at this Budget are significant. Even more so
because, due to his self-imposed ‘one Budget a year from 2018’ promise,
this is the last fiscal event before politicians vote on the draft
Brexit deal in October 2018.
With future investment intentions in manufacturing subdued (in part due to Brexit
), this Budget will be a make or break on business investment and the double barrels of a robust industrial strategy and a fiscal package to propel business investment is needed.
Our 2017 Autumn Budget submission published today makes the following recommendations to deliver that boost:
- Increase the rates of capital allowances to 30% for the first two years of qualifying investment for a time limited five year period
There is a role for tax policy to ensure that UK companies do not miss this window in the business cycle to upgrade and invest in world class technology. Accelerated depreciation, through a higher capital allowance rate in the first two years of the investment for a time limited five year period, could bring forward these investments. This could ensure that companies have the optimal level of automation within their businesses if and when the supply of skilled migrant labour is restricted following Brexit.
- Cap increases in the business rates multiplier at two per cent to minimise increases in business costs
The recent business rates revaluation saw the lowest fall in the multiplier between Rating Lists since records began, falling by 1.8p. For the 2000 Rating List the multiplier fell by 7.3p, in 2005 by 3.4p and in 2010 by 7.1p.
This miniscule fall in the multiplier for the 2017 Rating List means that if the RPI rate for September 2017 is used, the multiplier will be back above the rate it was at prior to the end of the 2010 List.
- Promote the benefits associated with the 4th industrial revolution through demonstrators and enhance supply chain cooperation on 4IR innovation and adoption through collaborative funding as part of the Industrial Strategy Challenge Fund
Given the benefits in terms of firm productivity and supply chain efficiency that the adoption of modern manufacturing could bring, there is an urgent need to correct the market failures associated with process innovation to help spur the benefits of the 4th industrial revolution. Demonstrators could solve uncertainty by advertising applications of 4IR-related technologies and increasing awareness of benefits in terms of productivity improvements, cost reduction, quality improvements or health and safety.
- Increase the rate of the R&D tax credit under the Large Companies scheme
Tax incentives for R&D continue to be the top support scheme for innovation. EEF’s surveys show that 70% of surveyed companies have used R&D tax credits to help them meet their innovation requirements in the past three years. However, the current R&D tax relief under the Large Company scheme is one of the least valuable in terms of implied subsidy rate when compared with major OECD countries.
Our full Budget submission, including other recommendations is available below.