Friday, March 10, 2017

The Budget.

Last week was dominated by the Budget. First chance I've had to comment on it. The Chancellor of the Exchequer told us it will be the last 'Spring Budget'. In future there will be just one budget per year. It will be delivered in the Autumn. I was expecting a fairly quiet, 'not very noteworthy' bit dry sort of a budget. Turned out not to be the case.

Any responsible budget always has to take account of the national finances, the annual deficit and the National Debt, which has reached an eye-wateringly high level. Throughout the current year, the Government is spending/investing over one billion pounds more every week than it is raising. The deficit is predicted to increase next year. This level of borrowing is deeply unfair to our children and grandchildren, who will eventually have to deal with this debt. Despite, the very good news last week that growth was higher than we thought, and the current year's deficit is a bit less than predicted, the Chancellor rightly decided that his budget must be fiscally neutral. Any extra spending has to be matched by spending reductions elsewhere. My view is that anyone opposing tax increases or promoting increased spending must tell us where the money is coming from to be credible.

The main extra spending announced by the Chancellor was for social care with some extra investment in training and education, and some relief for those hit by big increases in business rates. I was particularly supportive of help for social care. We are, on average, living much longer. Inevitably the cost of care through these extra years of life is comparatively high. We should look on the two billion extra (one billion in 2017/18) as no more than a first step. We must also accept that while unemployment is at record levels, our productivity must improve. Investment in training and education is crucial as the UK develops new trading links across the world.

Much the most controversial tax change in the Budget was a proposal to raise Class 4 National Insurance Contribution by 2% over the next 2 years, impacting on the self-employed. There is very public disagreement whether this is a 'broken promise' from the Conservative Party's 2015 manifesto. It's widely reported that it is a 'broken promise' but the Chancellor is adamant that the 'election promise' related only to Class 1 contributions - which is what 85% of the employed working population pays. Interestingly (to me anyway) that in discussion with my accountant today, he said that the accountancy profession had been assuming Class 4 at 12% for years! Whatever, there seems no doubt that the Chancellor and Prime Minister did not see this as a 'broken promise' at all, even if they thought it a difficult decision.

But the bigger question must be whether it's a sensible justifiable tax change. There's no doubt that it's disappointing to the self employed, normally thought to be a group favourably disposed to a Conservative Govt. While I do not think tax policy should be set on the basis of political considerations, I myself have a positive view of the enthusiasm and drive of the self employed. A negative reaction from a group who normally offer support is not welcome to this writer.

But is the Change fair. Usually, we look to the Institute of Fiscal Studies for the authoritative unbiased judgement. Today the IFS has enthusiastically welcomed the change, describing the current system as "distorting decisions, creating complexity and unfair". The IFS also points out that the current rapid switch from being employed to being self-employed is seriously undermining the tax base, and has left the Chancellor with little option other than to do what he did - even if my personal instinct to lower taxes might prefer some reduction in Class 1 NIC as the way to equalise Class 4 and Class 1.  As someone who has always been self-employed, I can fully understand the disappointment. And I can see fierce debate when this issue comes before Parliament in the autumn. 

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