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Chancellor delivers conservative Spring Budget as Brexit looms

Published: 15:01 08 Mar 2017 GMT

Hammond

Chancellor Philip Hammond today delivered what some have dubbed a "Brexit-proof" Budget that included tight fiscal spending and tax increases for the self-employed.

As anticipated, Hammond’s first Spring Budget offered few surprises as most of the main fiscal announcements are expected in autumn when the Budget and the Autumn Statement are rolled into one.

The Budget comes as the government prepares to trigger Article 50, which would begin the UK's formal exit from the European Union. Prime Minister Theresa May has said the government is aiming to do this by the end of March.

The Chancellor's Budget showed the economy has so far performed better than expected following the Brexit vote last June.  

OBR forecasts...

Hammond said the Office for Budget Responsibility (OBR) has raised its estimate for gross domestic product in 2017 to 2.0% from a previous projection of 1.4%.

Looking further ahead, the OBR expects GDP to fall to 1.6% in 2018 before picking up to 1.7% in 2019 and 1.9% in 2020. The forecasts for 2018 to 2020 marked a downgrade from previous estimates of 1.7%, 2.1% and 2.1%, respectively. 

The GDP estimate for 2021 was left unchanged at 2.0%.

Inflation is expected to overshoot the Bank of England’s 2% target for the next two years.

The OBR sees inflation reaching 2.4% this year before falling to 2.3% in 2018 and 2.0% in 2019, the Chancellor said.

On public sector borrowing, the OBR revised down its short-term forecast by £16.4bn in 2016/17.

National debt is expected to peak at 88.8% of GDP in 2018/9 before falling to 79.8% in 2021/22.

Tax increases for self employed...

The self-employed will be expected to pay more national insurance as Hammond said the gap between their contributions and employees is “no longer justified” by the difference in benefit entitlements.

Class 4 national insurance contributions will rise by 1% to 10% in 2018 and by a further 1% in 2019.

Hammond said the move would raise an extra £145mln by 2021-22.

“I make no apologies for raising additional revenues,” he said.

He said the move will raise will raises a net £145m a year - around 60p a week per self-employed person, he adds

There will be some relief for workers as the personal allowance – the amount you can earn before paying income tax – is set to rise to £11,000 from £11,500 in April.

Hammond reiterated the government’s promise vowed to lift this to £12,500 by 2020-21.

The threshold for higher earnings, which incurs a 40% income tax, will also be raised to £50,000 by then, he added.

Business rates relief...

Hammond announced three measures amounting to extra £435m cut to business rates.

The measures include a £1,000 discount on business rate bills for all pubs with rateable value of less than £100,000, which represents 90% of all pubs.

Businesses coming out of small business rate relief will not see their bill increase by more than £50 a month.

A £300m fund will also be issued to councils to allow them to provide discretional relief.

Beer, cigarettes and sugar...

There will be no changes to previously planned duties on alcohol and tobacco.

However, a new minimum excise duty will be introduced on cigarettes based on a pack price of £7.35.

Hammond also confirmed sugar tax rates of 18p and 24 pence per litre for the main and higher bands respectively from 1 April

Schools..

The Chancellor confirmed funding for an extra 110 free schools, on top of the 500 already announced.

An extra £260mln will be invested in improving school buildings.

There will be also an extra £500mln for maintenance loans for 16-19-year-olds on technical courses. The number of hours for training these students will rise by more than 50%.

Social care...

Hammond has announced an extra £2bn for under-pressure social care services in England over the next three years.He acknowledged the crisis in social care, saying the system was under pressure and has been weighing on the NHS.

What analysts think...

Pantheon Macroeconomics analyst Samuel Tombs said Hammond has stuck to “intense fiscal tightening”.

“The Chancellor has lived up to his reputation for fiscal conservatism and is pressing ahead with a tough fiscal tightening in order to create scope to loosen policy if the economy struggles after Brexit,” he said.

Tombs said the fiscal headroom the Chancellor has left is likely to turn out to be much smaller than he currently expects as the OBR has not made a provision for any severance payment that the UK might need after Brexit.

Nancy Curtin, chief investment officer at Close Brothers Asset Management, said it was not the most memorable Budget on record but delivered some good news. The economy has grown faster than expected since the UK voted to leave the EU and the government has provided a more positive outlook for 2017, Curtin highlighted.

“Investors would no doubt have preferred to see a greater commitment to pro-growth investment from Hammond," the analyst said.

“Measures like the £500mln investment in technology, innovation and robotics are positive, but limited in scope. It’s clear that Hammond is setting aside a fiscal shock absorber should Brexit negotiations de-rail growth, or indeed, if monetary policy changes to combat inflationary pressure.”

Howard Archer, chief UK and European economist at IHS Global Insight, said while the GDP forecast for 2017 was lifted, the estimates for 2018 to 2020 have been trimmed.

"We suspect the upgrading of the 2017 GDP growth forecast to 2.0% will likely prove to be over-optimistic and we also believe that growth will come in lower than the OBR expects in 2018. This would put upward pressure on the fiscal targets."

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