Autumn Budget 2017 Contents

Conclusions and recommendations

The Economy: Productivity

1.In common with many other forecasters, the OBR has been consistently overly optimistic in its forecasts for productivity growth. It has now chosen a path for productivity that lies between the pre- and post-financial crisis trends. Productivity will need to increase to a rate more than twice as fast than has been achieved for the past nine years, if it is to grow in line with the OBR’s forecast. (Paragraph 27)

2.Just as the causes of persistently weak productivity growth in the UK and the rest of the developed world are poorly understood and are widely described as a productivity puzzle, so the optimum policy response from Government is not obviously clear. No one single policy measure in isolation is likely to address the large number of potential causes of the productivity puzzle. (Paragraph 28)

3.A rise in well-focused investment, both public and private, is likely to improve productivity growth in the long term. The Government has set out plans to raise public investment to the highest level, as a percentage of GDP, for the last 30 years. This is a welcome commitment. Nevertheless, a revival in productivity will also require a response from the private sector, which accounts for three-quarters of investment. At the moment, the OBR expects a fall in private sector investment, as a proportion of GDP, over the coming five years, owing to Brexit-related uncertainty. The Committee reiterates its conclusions about the urgency of reaching agreement on transitional arrangements for Brexit that reduce short-term uncertainty for business, and the importance of establishing clarity on the long-term UK-EU economic relationship. (Paragraph 29)

4.As the UK leaves the EU, continued openness to trade, foreign investment and migration are likely to be prerequisites to a revival in productivity performance. (Paragraph 30)

5.The OBR has stated that the link between trade intensity and increased productivity is insufficiently well understood to be included in its forecast, and as a result has not included any decline in productivity due to reduced trade intensity in its post Brexit forecast. The Committee is concerned as this conclusion stands in contrast to the assumptions made by the Treasury, Bank of England and the Secretary of State for International Trade, that higher trade intensity leads to higher productivity growth. If trade intensity initially declines as a result of Brexit, as is forecast by the OBR, and does lead to a decline in productivity (as is assumed by the Treasury, the Bank of England and the Secretary of State for International Trade) it would significantly worsen the expected economic and fiscal consequences of leaving the EU, compared to what the OBR forecasts at present. (Paragraph 31)

The Economy: OBR forecasting alternative scenarios

6.The OBR uses the ONS’ migration forecasts as its input figure for migration in its economic forecast. These forecasts have been consistently above the tens of thousands, which is in contradiction to the Government’s stated policy of reducing migration to the tens of thousands. In its Economic and Fiscal Outlook November 2016, the OBR forecast that the impact of leaving the EU would increase Government borrowing by £58 billion over the forecast period. It has not since revisited this assessment. However, as 2018 progresses, the Committee judges that the ability to revise the November 2016 forecast is likely to be possible and the Committee recommends the OBR does so at the earliest possible opportunity. (Paragraph 41)

7.The OBR has stated that it still has no meaningful basis to judge the UK’s final relationship with the EU, on which it can condition its forecast for the economy and the public finances. However, the absence in its forecasts of a step change in trade intensity at the point that the UK is expected to leave the EU (in March 2019) is consistent with a scenario where transitional arrangements are negotiated. The forecasts are not consistent with a reversion to WTO rules in March 2019, which would be likely to lead to a substantial negative trade shock from Q2 2019 onwards. (Paragraph 42)

8.Although no specific attempt has been made to forecast the long-term impact of the UK’s end-state relationship with the EU, Robert Chote has acknowledged that the consequences of Brexit on economic growth, whether positive or negative, are likely to be so substantial as to dwarf the impact of the financial settlement. (Paragraph 43)

9.Parliament will need to be fully informed about the size and the direction of these economic and fiscal impacts before it comes to vote on the legislation giving effect to the withdrawal agreement. The independent OBR is best placed to provide this information. It should publish an economic outlook that incorporates the terms of the Withdrawal Agreement prior to Parliament’s consideration of the planned Withdrawal Agreement and Implementation Bill. If the next scheduled forecasts, due to be published around November 2018, come either too early to incorporate the terms of the Withdrawal Agreement, or too late for Parliament’s consideration of the Bill, the OBR should prepare a special forecast. The legislation setting out the OBR’s statutory responsibilities requires the OBR to publish a minimum of two forecasts a year, but does not set an upper limit. (Paragraph 44)

The fiscal rules

10.Despite a chequered history, a well-designed fiscal rule can add something to the credibility of fiscal policy in the eyes of markets and the public. But with each rule that is abandoned, the task of maintaining credibility is made more difficult. (Paragraph 54)

11.The Charter for Budget Responsibility is out of date, and the fiscal rules that it sets are consequently open to interpretation. If the Government’s objective is now to run a balanced budget by 2025–26, the Charter should be updated to reflect this unambiguously, as a matter of urgency. The Committee recommends it must be updated at the 2018 Spring Statement. (Paragraph 55)

12.To maintain the credibility of fiscal policy, the design and timing of policies should primarily be focused on achieving policy objectives and improving the public finances, rather than meeting fiscal target deadlines. The implementation of a 30-day window for paying Capital Gains Tax appears to be delayed in order to create a one-off windfall to the public finances in the year of the fiscal target. Using the fiscal rules in this way risks damaging the credibility of fiscal policy, the very thing that the rules are designed to protect. (Paragraph 56)

13.As with its predecessor, the new fiscal rule is judged against a fixed point in time. As a result, to meet the target date, large spending cuts or tax increases may be required as the target deadline approaches. (Paragraph 57)

14.It is unclear why the Government has chosen to target a decline in the net debt to GDP ratio in a single year (2020–21), rather than a continuously falling ratio. The net debt to GDP ratio should be put in a framework that signals the intention to bring about a decline over a consecutive run of years, as was the case in the supplementary debt target in force prior to the Autumn Statement 2016. (Paragraph 61)

15.There is a strong case for excluding the Bank of England Term Funding Scheme (TFS) from the net debt ratio target. This is because the repayment of the TFS in 2020–21 produces a material one-off change to the net debt ratio. This change happens independently of Government policy and distorts the underlying trend, which makes the target easier to meet in the Government’s chosen year. (Paragraph 62)

Government spending on preparation for Brexit, and the financial settlement with the European Union

16.The Chancellor announced an additional £3 billion of spending on preparing for Brexit in the Government’s policy scorecard. This additional spending will be funded from increased Government borrowing rather than being allocated from existing resources. (Paragraph 68)

17.The Chancellor has acknowledged that additional spending—and borrowing—on top of this £3 billion may be needed as the country prepares for all possible Brexit eventualities. (Paragraph 69)

18.Members of the Government have repeatedly stated that the OBR has included the UK’s financial settlement with the EU within its November 2017 forecast. This is not supported by the OBR’s Outlook. The OBR has assumed that the UK’s contributions to the EU budget are ‘recycled’ into domestic spending after March 2019, but it makes no judgement about the purpose to which these funds are deployed. The impact of the financial settlement on the public finances will depend on its size and the schedule of payments, neither of which are known at this point. It will also depend on the purposes to which the settlement is deployed. Until the final payments and scheduling are agreed, the Government cannot assume there will be additional money available for domestic spending. (Paragraph 75)

19.While the size of the exit payment is likely to be significant, the Committee notes Robert Chote’s evidence that the impact of any one-off divorce bill on the public finances is likely to be dwarfed by the consequences of Brexit, positive or negative, for the long-term outlook for economic growth. (Paragraph 76)

Stamp Duty and housing measures

20.The changes to Stamp Duty Land Tax (SDLT) in the Budget helps first-time buyers by reducing the sum of money needed to save to purchase a house. However, the OBR forecasts that just 3,500 additional first-time buyers over the forecast period will enter the market as a result of the policy change, at a cost of £3.2 billion. There needs to be a step change to helping first-time buyers purchase a home. (Paragraph 93)

21.The OBR forecasts that a permanent reduction in SDLT in isolation will increase the affected first-time buyer house prices by double the reduction in SDLT. The previous ‘Stamp Duty Holiday’, which was in operation from March 2010 to March 2012, was found by HMRC not to have increased affordability, and to have resulted in an increase in the number of first-time buyers of “between zero and two per cent”. (Paragraph 94)

22.The new SDLT schedule creates a cliff edge at the £500,000 price point, which will create distortions to the housing market. A house worth £500,000 will attract £5,000 less in SDLT than a house worth £500,001. When the previous Government redesigned SDLT to remove ‘cliff edges’ faced at certain property values, the then Chancellor said that he had reformed a “badly designed system that has distorted our housing market for decades”. It is regrettable that the abolition of SDLT for first-time buyers reintroduces a cliff edge into the SDLT schedule. (Paragraph 95)

23.The eligibility for SDLT relief for first-time buyers being extended to houses worth up to £500,000 recognises that previous measures aimed at first-time buyers such as the Help-to-Buy ISA (which were capped at £450,000) excluded some parts of the country. The Committee notes such a recognition. (Paragraph 96)

24.The only sustainable way to address housing market affordability, both for first-time buyers and other households, including those in the rental sector, is to significantly increase the supply of new housing. The Autumn Budget alone is unlikely to achieve this. (Paragraph 97)

25.Despite the Government’s latest housing announcements, the OBR has reduced its residential investment forecast since the Spring Budget. Residential investment is forecast to remain below levels prevailing prior to the financial crisis, a period when housebuilding was considerably below the Government’s new target. (Paragraph 98)

26.Over the past 60 years, private housebuilders have consistently provided around 150,000 units per year. Given this historical record, it is unlikely that the Government’s target of 300,000 new homes per year will be met without a significant increase in the supply of units provided, either directly or indirectly, by local authorities and by housing associations. (Paragraph 99)

27.The decision in the Budget to raise the Housing Revenue Account borrowing cap by £1 billion is a positive step. However, in order to increase Local Authority construction to levels sufficient to meet the Government’s 300,000 target, the Housing Revenue Account borrowing cap should be removed. Raising the cap would have no material impact on the national debt, but could result in a substantial increase in the supply of housing, allowing local authorities to determine the level of additional housing needed in their area. (Paragraph 100)

28.The bidding process proposed by the Treasury to allocate the additional £1 billion of local authority housing revenue borrowing may not direct resources to areas of greatest housing need. The criteria for allocation are currently unclear. The Chancellor stated in his speech that the bidding process will be aimed at “high demand areas” but the Budget itself referred to “areas with high affordability pressure”. The Treasury should establish clearly defined, needs-based criteria for allocating the additional borrowing. (Paragraph 101)

29.Greater measures are needed to increase housing supply. 300,000 homes a year will not be achieved with the current measures. The Government will need to show greater commitment to housing supply to achieve its aspiration and will need to bring forward additional policy measures. (Paragraph 102)

Distributional analysis

30.The Committee welcomes the Chancellor’s decision to continue publishing distributional analysis showing the impact of fiscal policy decisions on households in different parts of the income distribution. However, there remains scope to make it still more transparent. (Paragraph 108)

31.The analysis groups together all policy measures announced since the Autumn Statement 2016. Consequently, the distributional impacts of policies announced in a particular Budget cannot be ascertained, as they are amalgamated with those of previous fiscal events. In future, the Treasury should publish an analysis of the impact of the measures in each Budget in isolation, alongside the cumulative effects. (Paragraph 109)

32.The decision by the Chancellor to reset the starting point for the analysis to the Autumn Statement 2016 means that decisions announced prior to this point are not included, even though their effects on households might not yet have been felt in full. For example, if the decision to freeze working-age benefits in cash terms and to reduce the scope and value of work allowances in Universal Credit were included, the analysis would appear materially worse for households at the bottom of the income distribution. (Paragraph 110)

33.To address such concerns about the transparency of the distributional analysis, the Treasury should provide the raw data underpinning it, so that individual policies of the Government and their distributional impact can be analysed in more detail. (Paragraph 111)

Equality impact assessment of the Budget

34.The Treasury should use ONS and HMRC data to produce and publish robust equalities impact assessments of future Budgets, including the individual tax and welfare measures contained within them. A deficiency of data in respect of some protected characteristics is not a reason for failing to produce an analysis in respect of others for which data is available. Nor should the risk of misinterpretation or methodological complexity preclude the publication of an Equalities Impact Assessment. Details on methodology and guidance on interpretation can be set out alongside the analysis, just as they are with the existing distributional analysis. (Paragraph 119)

35.The Committee notes that official statistics are currently used for such purposes, albeit inconsistently. For instance, HMRC concluded in its “Overview of Tax Legislation” that the supplementary charge for diesel car Vehicle Excise Duty (VED) negatively affects men more than women. It could equally use a gender breakdown of miles travelled by car in the National Travel Survey to draw conclusions about the impact of fuel duty, a policy which costs the Exchequer 56 times as much in foregone tax revenue as the changes to VED. (Paragraph 120)

36.It appears inconsistent that the gender impact of the increase in VED for new diesel cars was able to be assessed, but such an assessment was not able to be produced for the uprating of VED in general for vans, motorbikes and pre-2017 cars. The Committee would welcome an explanation. (Paragraph 121)

Business Rates and the so-called ‘staircase tax’

37.Moving to three year revaluation is an improvement to the Business Rates system. More regular revaluation will provide more accurate property valuations, and the changes to Business Rates that businesses experience will, on average, be smaller, and easier to adapt to. However, the benefits of this policy change will not be felt until 2025, when properties are revalued for the first time according to the new timetable. The Committee recommends the Government urgently investigates how to shorten the timescale between revaluations through, for example, revaluing properties annually between formal revaluations using published property price indexes. (Paragraph 128)

38.Business Rates damage the competitiveness of shops on the high street relative to large out-of-town distributors and online retailers. The Government should address the property taxation imbalance between businesses on the high street compared to those based on major out-of, or edge-of town, retail parks, and online businesses. (Paragraph 129)

39.The Supreme Court ruling meant that many businesses previously eligible for Small Business Rates Relief were no longer eligible, on the grounds that they happened to share a staircase with other tenants. Such a situation was clearly not what was intended by the policy. The Committee raised the issue in oral evidence with the Chancellor in October 2017. The Committee welcomes the Chancellor’s subsequent commitment to legislate to retrospectively remove the so-called ‘staircase tax’. (Paragraph 133)

40.The Committee welcomes the switch from RPI to CPI for the indexation of the Business Rates multiplier. (Paragraph 137)

41.The RPI is no longer a National Statistic and its deficiencies are numerous. The Government has acknowledged that using the statistically-flawed RPI to uprate the Business Rates multiplier is unfair on businesses. Having acknowledged this, the Government should now discontinue the use of RPI for any indexation purpose where legally possible. (Paragraph 138)

Social care funding

42.The social care precept is effectively a hypothecated tax. In previous Parliaments, former Treasury Committees criticised hypothecation of central government taxation, partly on the grounds that the revenue raised by such taxes rarely reflects the required amount of spending., (Paragraph 144)

43.The same arguments apply at local government level. Unless there is a strong justification for why social care funding requirements should grow in line with the council tax base in each local authority, the precept is not a sustainable or equitable way of financing social care. The drawdown of reserves among local authorities where social care demand is high, compared to the increase in reserves among local authorities where social care demand is lower, is evidence of this. The Government should consider, in the context of reforms to local government finance—including business rates retention—how social care funding can be allocated in a way that more closely reflects underlying demand and need in different parts of the country. (Paragraph 145)

Universal Credit

44.The Autumn Budget announced some welcome measures to address some of the problems encountered in the roll-out of Universal Credit. The removal of the seven-day waiting period ensures there is no period of time in which recipients are not accruing entitlement to payments. The ability to access up to one month’s worth of Universal Credit within five days via an interest-free advance should help to mitigate some of the delays in payment that have been experienced. (Paragraph 153)

45.The purpose of Universal Credit is to help people into work, and to stay in work. The Government should ease the cashflow challenges around Universal Credit by giving recipients the option of fortnightly payments, should this be more consistent with household needs. (Paragraph 154)

46.The Budget committed to keep the Universal Credit taper rate under review. Given that the taper rate may act as a disincentive to individuals taking on more work, or seeking promotion, the Government should explain why a high taper rate of 63 per cent is optimal. (Paragraph 155)

Assessment of the tax measures in the Autumn Statement

47.While there was concern among the taxation bodies regarding the administrative difficulties in designing and enforcing an overseas royalty payments tax avoidance measure, the Committee welcomes the Government’s initiatives to address tax avoidance through such royalty payments and structures that artificially move legitimate UK taxable profits out of UK tax jurisdiction. (Paragraph 162)

19 January 2018