Where WILL spendthrift Phil find all this cash for the Budget?
ALEX BRUMMER: Where WILL spendthrift Phil find all this cash for the Budget?
The transformation of the Chancellor from ‘Spreadsheet Phil’ to ‘Spendthrift Phil’ has been remarkable to behold.
In the weeks and days running up to today’s budget there have been all manner of tantalising pledges hinted at or revealed, more or less something for everyone.
Today, as the Mail reports, there is a promised extra £2billion boost for mental health services.
Yesterday’s papers announced a £30billion national roads fund, £800million extra to local government for social care, more millions to be invested in installing superfast broadband in remote areas, and possibly as much as £1billion for defence.
Just one question: Where will the money come from? Mr Hammond is better able to meet his spending pledges because of a tax windfall
All of this on top of the £1.5billion lifeline for the high street, including slashing business rates (temporarily) for small retailers, and an extra £20billion to already committed increases in the NHS budget announced in June.
Just one question: Where will the money come from? Mr Hammond is better able to meet his spending pledges because of a tax windfall.
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The public finances in the current financial year 2018-19 are in much better shape than forecast by the independent Office for Budget Responsibility in the spring.
Strong tax receipts, the result of near full employment and consumer confidence, mean that the Chancellor has an extra £13billion of cash to play with.
Remarkably, a decade of squeezing public spending and better-than-expected growth has seen the budget deficit plunge from £150billion to just £25billion.
The national debt, the accumulation of borrowing down the decades, has also begun falling.
The Chancellor is, additionally, starting to factor in a double Brexit dividend should Mrs May secure a deal with Brussels that could release up to £15billion of extra tax income as the economy takes off once we are free of EU red tape and restrictions.
It is hoped, too, that companies holding off on investment decisions will, post-deal, bring them forward, contributing to faster output.
And any deal could also release the £10billion or so that the Chancellor has been keeping in his back pocket to cushion a ‘no deal’ exit from the EU (although the Treasury is clear that this money will not be available until the spending review next spring).
Strong tax receipts, the result of near full employment and consumer confidence, mean that the Chancellor has an extra £13billion of cash to play with
However, Mr Hammond will need more than these windfalls to deliver on Prime Minister Theresa May’s announcement that austerity is over. And he’s not going to miss an opportunity to strengthen the public finances with new taxes.
One possibility is that he will choose to freeze the personal allowances for income tax, pushing a larger number of people into higher tax bands.
In essence, it’s a sleight of hand, a hidden income tax increase, but it does break an election manifesto pledge not to raise income tax.
Other targets include the tax relief granted for pensions savings, which Mr Hammond has described as ‘eye-wateringly’ generous. They particularly benefit more affluent households, and successive Chancellors have had them in their sights.
In essence, it’s a sleight of hand, a hidden income tax increase, but it does break an election manifesto pledge not to raise income tax
A near certain target is contract workers in the private sector. They currently escape national insurance and income tax requirements by working as independent contractors.
The measure, already applied to the public sector, could eventually raise up to £1billion for the Exchequer.
A range of ‘sin taxes’ on offshore gambling, tobacco and alcohol are also expected.
More controversial would be a rise in insurance premium tax, paid on car and home policies, and lowering the threshold at which firms start to pay VAT from the current figure of £85,000 – far higher than most of the EU.
Of course, the most crowd-pleasing tax the Chancellor could impose would be on digital behemoths such as Amazon, Google, and Facebook, which earn billions of pounds in Britain but pay virtually no corporation or company taxes of any size.
Mr Hammond wants to bring them within the tax net, possibly through a ‘user levy’, which would impose a charge for each click.
But such a sophisticated levy will take some years to implement. As an interim measure the Treasury favours a tax on turnover or sales (as opposed to profits).
Certainly, the Chancellor is going into the budget in a much stronger position than he could have hoped for just six months ago, courtesy of an economy that has expanded speedily enough to defy Project Fear and other gloomy forecasts about the impact of the EU referendum.
However, as a Tory Chancellor he must not sacrifice the hard-won fiscal gains of a decade of austerity.
Britain still has a legacy of £1.5trillion of national debt, which, at 86 per cent of national output, remains historically high.
Yes, the debt is beginning to fall, but not fast enough for the Chancellor to release the handbrake without public finances going into reverse. Prudence, as ever, must remain the watchword.
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