By GRANTfinder Team

Chancellor of the Exchequer Philip Hammond has delivered what is expected to be the Government’s final pre-Brexit Budget. Due to the precarious state of UK/EU negotiations, the Chancellor chose to break with his own Spring Statement/Autumn Budget timetable and present his financial plans for 2019-20 ahead of schedule.

Echoing the Prime Minister’s recent pledge, Mr Hammond began Budget 2018 by saying that "the era of austerity is finally coming to an end." He announced that in addition to the already-allocated £2.2 billion to government departments for Brexit preparations, the further £1.5 billion to be allocated in 2019-20 would be increased to £2 billion. Mr Hammond also confirmed a five-year path for additional departmental spending and that a full departmental spending review will take place as expected in 2019.

The Chancellor announced that the latest Office for Budget Responsibility (OBR) forecasts for UK economic growth had revised expected growth from the previous 1.3% forecast at the Spring Statement to 1.6% next year, then 1.4% in 2020 and 2021; 1.5% in 2022; and 1.6% in 2023. Describing these figures as a “significant improvement” in the public finances, the Chancellor said this would allow him to "set out a new path for public spending.”

Over the next five years, Mr Hammond has authorised £30 billion of extra spending needed to honour pledges already made by the Prime Minister to end austerity and boost spending on health, education, local authority housing and other public services. However, this announcement was tempered by a rare public intervention by the OBR itself, warning that the decision to spend much of the extra funds forecast for the exchequer over the next five years would leave the Chancellor in danger of missing one of his two fiscal rules.

Robert Chote, chairman of the OBR, acknowledged public finances had performed better than the OBR and outside forecasters had expected in March, even though the economy has grown less quickly, but said: "If he had sat on his hands and done nothing, [the chancellor] would have reached his long-term objective of balancing the budget by 2025, which is in the legislation and is something he must do. But looking at the outlook now, it doesn’t look like he is on track to make that target.”

In June of this year, the Prime Minister announced a new multi-year funding plan for the NHS. In return, the NHS would agree a new ten-year plan with the Government later this year, which will provide the specifics of how this money is to be spent. The Budget confirmed the Prime Minister’s increased funding commitment of £20.5 billion in real terms per year by 2023-24. This means that the NHS will receive an average 3.4% a year real-terms increase in funding over the next five years. This will take the NHS budget from £114.6 billion in 2018-19 to £149.01 billion in 2023-24. The funding will be front-loaded with increases of 3.6% in the first two years, which means £4.1 billion extra in 2019-20. Budgets for mental health services will grow as a share of the overall NHS budget over the next five years.

Referring to the June announcement, Mr Hammond said: “we made our big choice for this budget, four months before it was delivered.” Describing the NHS as “the number one priority of the British people”, he stated that the NHS will be publishing a plan for reform, including a new NHS crisis service, with children and young people’s crisis teams available in all parts of the country. The funding is for the NHS England commissioning budget only. This means it does not include capital funding, public health, health education, or social care. Professor Anita Charlesworth, a former head of public spending at the Treasury, and director of economics and research at the Health Foundation commented:

“This money is for frontline NHS services. It excludes wider areas of vital health spending where funding is also desperately needed: public health, workforce training and capital investment.

“Robbing Peter to pay Paul is tempting for any government short of money and facing multiple competing demands. However, it is rarely a sustainable strategy. The government is storing up problems for the future by only focusing on frontline services while ignoring other areas of vital health spending.”

Extra resources in the budget for social care included a further £650 million in social care grant funding for English councils in 2019/20. There was also £45 million for facilities for people with disabilities, to help them live independently, and £84 million over five years, for up to 20 local authorities, to expand programmes for children in care. The Government will publish a (delayed) Green Paper on the future of adult social care. Warning that there will be “difficult choices” on reforming the social care system, the Chancellor said that longer-term funding decisions for social care will be made at the Spending Review. Alzheimer’s Society chief executive Jeremy Hughes said £650 million may "prop up the broken social care system", but "only just staves off total collapse".

The Chancellor also announced plans to introduce a digital services tax from April 2020 following a consultation. The new UK tax is a levy against social media platforms, internet marketplaces and search engines. It will only be paid by firms that generate £500 million in revenue. The tax will see established tech giants taxed 2% on money they make from UK users. Currently, these firms pay taxes on UK profits, which is a much smaller figure than revenues. The tax is expected to raise £400 million in 2021-22 and £440 million the year after. Mr Hammond said: "It is clearly not sustainable or fair that digital platform businesses can generate substantial value in the UK without paying tax here." According to the Tax Watch thinktank, five of the biggest US technology firms – Facebook, Google, Apple, Microsoft and Cisco – could be depriving the Treasury of more than £1 billion a year. The thinktank’s study is the first estimate of the overall value of US tech giants' UK activities.

Companies such as Amazon and Facebook have been criticised for the small amount of tax they pay in the UK. George Turner, author of the Tax Watch report, said: “The Government must ensure taxes on profits made in this country are paid here. What is needed is a rethink of how multinationals are taxed, and an acceptance the current approach isn't working.”

Julian David, chief executive of industry body TechUK, argued that the proposed £500 million threshold was low and “risks capturing much smaller companies than anticipated.”

The Treasury said earlier this year that a levy on digital companies' UK sales would be implemented until an international deal could be reached.

Recent Budgets have seen a particular focus on increased funding for research and innovation, and this trend continued this year. Most notable here was the announcement of a further £1.6 billion for R&D funding to support the modern Industrial Strategy. As part of this investment, the Government will increase the Industrial Strategy Challenge Fund (ISCF) by £1.1 billion, supporting technologies of the future. This includes:

  • Up to £121 million for Made Smarter to support the transformation of manufacturing through digitally-enabled technologies, such as the Internet of Things and virtual reality.
  • Up to £78 million for the Stephenson Challenge, supporting innovation in electric motor technology, making vehicles lighter and more efficient than ever before.

The Government will invest a further £235 million to support the development and commercialisation of quantum technologies, including up to £70 million from the ISCF, and £35 million to support a new national quantum computing centre. These technologies will transform capabilities in computing, sensing and communications, bringing promising new approaches to solving global problems such as disease and climate change.

Further funding from this package includes £120 million for the Strength in Places fund, which will support clusters of science and innovation excellence across the UK, and up to £50 million in new Turing AI Fellowships to bring the best global researchers in AI to the UK, alongside £100 million in an international fellowship scheme to attract, retain and develop world-leading research talent. The Government will also provide £5 million to support up to 10 local areas to develop proposals for new University Enterprise Zones to promote collaboration between universities and businesses, support start-ups and scale-ups, and disseminate management skills.

Chief Executive of the Russell Group of universities Dr Tim Bradshaw responded positively to the continued investment in research funding announced at the Budget, but warned that the future prosperity of the nation’s universities depend on continued investment as well as the outcome of the Brexit negotiations. He said:

“Russell Group universities are keen to play their part in building a strong future economy. In order to do so, and to realise the ambitions set out by Government today, we need sustainable funding for higher education and a good Brexit deal which supports continued collaboration with our European partners and maintains a dynamic flow of people and ideas.”

Further headline funding includes additional support for the National Productivity Investment Fund (NPIF), which was established in 2016 to provide additional capital investment in areas critical to productivity, namely: housing, transport, digital infrastructure, and R&D. The NPIF will now run for an extra year covering 2023-24 and will receive more than an additional £7 billion in funding, bringing its total to £37 billion.

Addressing skills, the Chancellor announced £695 million of funding to help small firms hire apprentices. As part of this:

  • Up to £450 million will be made available to enable apprenticeship levy paying employers to transfer up to 25% of their funds to pay for apprenticeship training in their supply chains.
  • Up to £240 million will be available to halve the co-investment rate for apprenticeship training to 5%.
  • Up to £5 million will be provided to the Institute for Apprenticeships and National Apprenticeship Service in 2019-20 to identify gaps in the training provider market and increase the number of employer-designed apprenticeship standards available to employers.

The investment in apprenticeship funding was welcomed by the Head of Business Environment and Skills Policy at the British Chambers of Commerce, Jane Gratton, who said:

“Apprenticeships are key to solving the skills crisis that is now crippling businesses across most regions and sectors, but the costs can be prohibitive for smaller firms. Reducing the cost of apprenticeship training for SMEs will help firms to invest in workforce skills to boost their productivity and competitiveness, as well as creating more jobs, and better career development opportunities for people of all ages.”

Additional measures at-a-glance

Key announcements from Budget 2018 include the following:

  • £1 billion extra in defence funding over the next two years to boost the UK's cyber capabilities and anti-submarine warfare capacity. Mr Hammond also announced an additional £160 million of Counter Terrorism police funding for 2019-20.
  • Marking the centenary of the First World War, an extra £10 million for the Armed Forces Covenant Fund Trust to support veterans with mental health needs, while up to £8 million will help with the cost of repairs and alterations to village halls, miners’ welfare facilities and Armed Forces organisations’ facilities. £1.7 million will also be made available for First World War Battlefield visits for school students.
  • A £400 million fund to help schools buy the extras that they need. The fund will take the form of a one-off capital payment directly to schools, averaging £10,000 per primary school and £50,000 per secondary school.
  • An additional £420 million available immediately to Local Highway Authorities to tackle potholes, bridge repairs, and other minor works in this financial year.
  • The Annual Investment Allowance will be increased from £200,000 to £1 million for two years; and UK Export Finance’s (UKEF’s) direct lending facility will be increased by up to £2 billion to support British exports.
  • An additional £200 million of funding will be allocated to the British Business Bank to replace access to the European Investment Fund if needed.
  • The Government will abolish the use of the private finance initiative (PFI) for future projects, with the Chancellor saying there is compelling evidence that it does not deliver value for taxpayers or genuinely transfer risk to the private sector. However, the Government will honour existing contracts.
  • Business rates will be cut by one third for firms with a rateable value of less than £51,000, resulting in an annual saving of up to £8,000 for 90% of all independent shops, pubs, restaurants and cafes.
  • A £675 million Future High Streets Fund to provide support for the British High Street.
  • A range of measures to tackle tax avoidance and evasion were announced to raise £2 billion over the next five years. These include ending the practice of purchasing services through overseas branches to avoid UK VAT; cracking down on insurance companies routing services through offshore territories; and preventing abuse of the UK’s R&D tax credits system by re-introducing a PAYE restriction for the SME scheme.
  • £500 million for the Housing Infrastructure Fund to unlock 650,000 homes. The Government plans to empower up to 500 neighbourhoods to buy land for housing for sale to local people in perpetuity.
  • The abolition of Stamp Duty for first-time buyers on properties up to £300,000 will be extended to all first-time buyers of shared ownership properties valued up to £500,000. This will be applied retrospectively to any first-time buyer since the last Budget.
  • £950 million for the Scottish Government, with £150 million for a Tay Cities Deal; £550 million for the Welsh Government, with £120 million for a North Wales Growth Deal; and £320 million for the Northern Ireland Executive, with £350 million for a Belfast City Region Deal.
  • The Transforming Cities Fund will be increased to £2.4 billion.
  • Tax rates for the oil and gas industries will stay at the same level, with the Government spending £12 million on new technology and safety measures for the fishing industry.
  • The Entrepreneurs Relief will remain, but the minimum qualifying period for the relief will be extended from 12 months to 2 years to ensure it is benefitting genuine entrepreneurs.
  • The Government will consult on the detail and implementation timetable of a new tax on the manufacture and import of plastic packaging which contains less than 30% recycled plastic. £10 million will also be allocated to deal with abandoned waste sites.
  • A package of measures worth £1 billion over five years to assist the migration to Universal Credit. Work allowances in Universal Credit will also be increased by £1,000, at a cost of £1.7 billion.
  • From April 2019, the National Living Wage will rise by 4.9%, from £7.83 to £8.21. The Government will also raise the tax-free Personal Allowance to £12,500 and the Higher Rate Threshold to £50,000 from next April, a year earlier than scheduled, before indexing both in line with inflation from 21-22.

Is this really a Budget for the long-term?

Budget 2018 is perhaps best considered in the context of two upcoming events: the 2019 Spending Review and Brexit. Usually taking place every two to five years, Spending Reviews set government departmental budgets for the next three to five-year period. The 2015 Spending Review asked departments to come up with savings plans of 25% and 40% of their budget (the NHS, Official Development Assistance, national security and per-pupil schools budgets were ringfenced from cuts). The Treasury is already negotiating with departments across Whitehall for the 2019 Spending Review and is reportedly seeking savings of 5%.

When announcing next year’s Spending Review at March’s Spring Statement, the Chancellor said: "First you work out what you can afford. Then you decide what your priorities are. And then you allocate between them." However, Mr Hammond now finds himself bound by the Prime Minister's pledge to end austerity and boost public spending. During her speech at the Conservative Party Conference in October, Theresa May said: “When we’ve secured a good Brexit deal for Britain, at the Spending Review next year we will set out our approach for the future.”

Despite the Prime Minister’s optimistic tone, time is running out for a negotiated Brexit, and the Chancellor has already signalled the need for a further Spring Budget in the event of 'No Deal'. Despite already allocating over £4 billion in total to Brexit preparations, the economic consequences of exiting the EU without a deal to maintain UK access to the Single Market and its closest trading partners would necessitate urgent measures to keep the economy afloat. In the event of ‘No Deal’, the Chancellor would be tasked with balancing a commitment to ending austerity with the need to prevent the UK from falling into a widely-predicted recession.



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