In anticipation of the Chancellor’s Autumn Statement, Newgate has asked a panel of experts what they hope to hear from Philip Hammond.
David Buik, Market Commentator at Panmure Gordon
This past year has been the most momentous one, politically, since 1961 when Nikita Khrushchev threatened the US with nuclear war and before that it was probably 1945 when the UK electorate hoofed Churchill ignominiously in to the long grass of political oblivion. This year the world has experienced two political bombshells – the EU Referendum and the US Presidential. Which of these two historic events will cause the most international disruption remains to be seen? I suspect it will be Donald Trump’s Presidency, though BREXIT is bound to create more than the odd ripple of uncertainty across the globe.
Theresa May would never have chosen to be elected PM in the manner she was, had she been given the choice. She is not a natural ‘Brexiteer’ but she is committed to delivering the will of the people. Clearly she does not enjoy the same relationship with Philip Hammond as David Cameron did with George Osborne. So this Thursday’s Autumn Statement is more likely to have as many of Mrs May’s dabs on it as Philip Hammond’s and more than a sprinkling of Nick Timothy’s. This is going to be a very tricky autumn statement since the prophets of doom over Brexit are starting to mass their troops. The Autumn Statement is more likely to be Government’s presentation than one stamped with ‘Hammond Culture.’ This morning’s EU obsessed FT headline of a possible £100 billion budget hole may have rattled Mr Hammond’s cage. So will the Chancellor will be on his metal. As my revered colleague and Panmure’s Chief economist puts it very succinctly. “Will it be –
- A large state, redistributionist PM: the one of her Conference Speech, or;
- A typical smaller state, tax cutting PM: the one typical of the current Tory party.”
Simon French goes on to say – “The reality is that only her inner circle knows for sure and even they may get out-manoeuvred when the Cabinet signs off the Autumn Statement next week.”
In March the OBR estimated a £55.5bn PSBR for 2016/17, down from £76bn in 2015/16. Six months in and borrowing is down only £2bn rather than the £10bn it would need to be to be “on track”. If this trajectory remains the same for the rest of the year then the government is on course to borrow £15bn more this fiscal year and with a target of £38.8bn in 2017/18 this would probably need to be revised considerably (~£25bn) higher as higher gilt yields and inflation are set to cost the government at the same time as post A50 growth forecasts are set to be pared downwards.
Does this matter? Well not really. The government can simply borrow more to fund the shortfall, fund any new spending commitments/ tax cuts. However May still aspires to balance the Budget so it will be important to show that borrowing is coming down YoY even if the point of balance is pushed well out into the next decade. Do not fall into the trap of thinking that more borrowing means higher Gilt yields. If we have learnt anything from Japan then it is that you can run a huge debt and deficit without yields spiking out of control – particularly if you are backstopped by your central bank.
The Statement is set to be an infrastructure and housing heavy Autumn Statement. There is talk of £15bn of additional spending but such a headline is a meaningless number as depends on timescale, new money versus old money etc.
The left field option is issuance of Infrastructure Bonds to finance all of this which is the “elegant accounting” approach (much like PFI) to keeping the infrastructure stuff “off book”. There will be pension funds falling over themselves to get involved with these and a retail offering would be another way that the “Country for All” box could be ticked.
Higher CGT, tighter restrictions on Non-Doms, greater scrutiny of Dividend Income (post Philip Green), a one-off wealth tax on high value property, removal of higher rate tax relief on pension saving cannot be wholly dismissed. For the avoidance of doubt I don’t think May or Hammond will want to do any of the latter but they are in a fiscal straightjacket and if they want to do infrastructure expansion and keep some semblance of fiscal discipline I do not see how they cannot. A raising of tax threshold from £11,000 to £12.500 to help those ‘JAM’
Simon French also thinks talk of a VAT cut or a Fuel Duty cut is premature. Much more likely to come at the Budget when the cost of living impacts of inflation may be more salient in the electorates mind.
A tightening of residential property ownership in a corporate envelope may be in order as the reaction of B2L landlords has been to put property in such a vehicle and pay themselves the rent as dividends. Government is likely to try and close this loophole.
On Pension Schemes then a carrot and stick is also set to be employed as the smoothed (and higher) discount rate applied to valuations may be supplemented with more powers to the Pension regulator to intervene during takeovers or to do ad hoc investigations with power of direction.
Finally on tax avoidance expect much to be made of the corporate responsibility agenda with country-by-country revenue reporting (post Panama papers) and perhaps a more transparent regime of corporate tax reporting for those with government contracts.
Who would be Chancellor of the Exchequer today?
David Buik MBE is a businessman and financial pundit for the BBC, Bloomberg Television, CNN International and ABC News (Australia).
He started his career at Philip Hill Higginson Erlangers in the City of London. He later worked for RP Martin, Kirkland Whitaker, London Deposit Agencies, Money Market Agencies, MY Marshall, and City Index Group.