With the release of the government’s Budget yesterday, WA’s Investor Services team takes a look at some of the major announcements and what the impact could be for the UK investor market.
Overall, Philip Hammond’s Budget has been well received by analysts for providing sensible spending decisions at this politically sensitive time. He gleefully addressed the Commons with figures from the OBR showing that the country’s economy is growing better than expected, and even managed to fit in a few jokes at the expense of the Opposition.
However, no Budget comes entirely without its critics. The Treasury’s decision to change tax rules for self-employed workers gained much of the media attention across this morning’s newspapers, with criticism that this is contradictory to the Tories’ 2015 manifesto and against Conservative values of helping business owners. He has faced a barrage of criticism for this decision, yet has been largely praised for his other, more practical measures put forward.
Education and skills
Chancellor Philip Hammond announced funding for new courses dubbed ‘T-levels’, the technical version of A-levels for 16 to 19-year-olds. The courses are designed to provide the necessary technical training for progression and will cover 15 different sectors of the economy. Although the plans were formed as part of the government’s ‘Post-16 Skills Plan’, yesterday’s announcement sees additional funding to the tune of £500m per year.
The Chancellor emphasised that the changes are designed to boost skills and productivity within the British workforce. Recent OECD figures on productivity saw the UK trailing behind its neighbours, at 16th place out of the G20. Improving levels of productivity will be a priority for the government going into the Brexit negotiation period, especially if we begin to face a skills shortage in light of changes to immigration.
With a raft of investment opportunities over the past 12 months in the education space, the Budget announcement could provide further openings for investors looking at education or apprenticeship providers. Yesterday’s announcement shows that the government is committed to raising the status of technical education, while seeing it as essential in overcoming shortfalls in productivity.
Social care
With pressure growing on the government to address the problems in the social care sector, Philip Hammond announced in his Budget an additional £2bn in grant funding over the next three years, with £1bn made available in 2017/18.
This is a change in tack from the government, who previously indicated their reluctance to provide additional funding to the sector. However, this announcement follows repeated calls for government intervention from sector stakeholders in the emerging social care ‘crisis’, with funding streams such as the Better Care Fund backloaded towards the end of this parliament.
As well as the announcement on funding, the government has confirmed plans to seek a longer term, sustainable solution for social care, with proposals due to be set out in a green paper that will be published for consultation later in the year. The Chancellor confirmed in his speech that the government is not considering introducing a “death tax” through a remodelling of inheritance tax to fund social care as was reported in the press last week.
For investors, the Chancellor’s Budget announcement is good news over the short term as it eases some of the immediate funding pressures on the sector. The sector was clearly in need of additional funding, and a further £2bn provides some of the assistance that providers require. However, the announcements did not address the wholesale reform that many are calling for to overcome longer term problems facing the industry. This means that although the announcements do provide some positives, they should be treated with elements of caution by those looking at any potential assets in social care.
Personal taxes
The Chancellor announced intentions to reform the tax system. Class 4 national insurance contributions for the self-employed earning more than £8,000 are set to rise from 9p to 11p in the pound, while the tax-free allowance enjoyed by investors will drop from £5,000 to £2,000 by 2018. Hammond cited early findings set out in the Taylor Review of modern employment practices that indicates self-employed people (who now make up 15 per cent of the UK workforce) are often paying significantly less tax than those in employment doing similar work. He said the Government would consult on the difference in National Insurance contributions between those earning similar wages but under different employment arrangements this coming summer.
The government is promoting this policy as part of its agenda to help ‘ordinary working families’, promising that anyone earning less than £16,250 will be unaffected. However, commentators and business leaders have come out strongly against the Chancellor, saying yesterday’s announcement directly contradicts the Conservatives’ position as being committed to supporting entrepreneurs and the self-employed. His changes to dividend taxation are also being interpreted as an attack on entrepreneurs, albeit aimed at the high income end of the self-employment market.
Separate to an attack on the Chancellor’s values, the matter has been compounded by accusations of lying, given the Chancellor’s announcement goes against promises set out in the Conservative’s 2015 manifesto. The Conservatives championed their proposal of “no increases in VAT, income tax or national insurance” going into the 2015 election, and members of the media and opposition have duly reminded Mr Hammond of this.
For investors looking at assets in this space, these proposed reforms are unlikely to be the last in the self-employment space. A lack of clarity on IR35 (disguised employment) rules, public sector responsibility for determining worker status, and workers’ rights are just some of the other issues that have policy makers scratching their heads over how to get this issue right. Helen Dickinson, Chief Executive of the British Retail Consortium, described Mr Hammond’s proposals as “another sticking plaster on a chronically ill patient”, while reports in today’s newspapers suggest the Chancellor could be facing a backbench rebellion over his changes. This means it’s unlikely this will be the last we hear of this policy changes in this area, with the potential for a rethink sooner rather than later.
Innovation and infrastructure
The Chancellor also announced £270 million for disruptive technologies like biotech, robotic systems and driverless vehicles. He also pledged £16 million for a new 5G mobile technology hub with £200 million for projects to get private sector investment in full-fibre broadband networks.
The tech sector continues to be the fastest growing part of the UK economy, and the additional funding shows the Chancellor recognises how important it is as the government looks to attract sustained investment following the Brexit vote. Industry stakeholders reacted well to his announcement, with techUK welcoming the Chancellor’s actions as “laying solid foundations” for an uncertain period ahead.
With the tech sector proving a particularly lucrative environment for investors in recent years, this announcement should therefore be welcomed. With some sectors of the economy likely to feel the pinch of Brexit as the government picks winners and losers, the tech sector looks set to stay relatively well protected.
He who has the last laugh…
Perhaps the most surprising element of this final Spring Budget was the Chancellor’s sense of humour. Known, perhaps unkindly, as ‘Spreadsheet Phil’, the Chancellor demonstrated that he is more than just dry and cautious.
But beyond his witty delivery, there were few surprises in this Budget statement, which made for broadly positive signs for UK investors. The Chancellor focused his narrative of providing a strong and stable platform for the UK as it begins negotiations for leaving the EU, avoiding political gimmicks or getting drawn into speculation about Brexit. His tightly scripted message emphasised strong public finances and investing in skills and innovation to tackle the UK’s productivity challenges underlines this point.
However, little from this final Spring Budget statement looks set to stand out as truly game changing – in many ways this was more tinkering rather than wholesale change. A new Autumn Budget later this year of course offers him a second chance.