In planning his Budget this year Phillip Hammond faces two significant problems, writes James Francis, Corporate Services Partner at Ensors Chartered Accountants. 

The first is the looming threat of Brexit. This will be the final Budget before the UK officially leaves the EU in March 2019. 

As such the Chancellor needs to reassure an increasingly uncertain set of stakeholders (especially internal and external investors) that; the economy is on a sound footing, the UK is the place to do business, and none of this will be changed by Brexit. 

He will need to be seen to take active steps to mitigate the risks of a hard or no-deal Brexit, whilst at the same time putting measures into place to allow the UK to take advantage of a more beneficial deal, if one can be obtained.

On a macro level, the UK economy is currently growing at a steady but somewhat lacklustre rate. Annual growth was 1.7 per cent in 2017 and is currently forecast to be 1.5 per cent in 2018. 

Although this is an increase of 0.2 per cent and 0.1 per cent, respectively on the predictions announced by the Chancellor at the last Budget, it does not reverse the more worrying long term downward trend in growth. 

When coupled with the anxiety and unpredictability of what may happen after Brexit there is some cause for concern regarding the medium to long term economic prospects of the country as a whole.

Although the vote to leave the EU has had less of a short term effect on the economy than many predicted, it is still the general opinion that the uncertainty surrounding any Brexit deal, and the divisions in government around how to tackle negotiations, have been a major factor in the slowdown in growth. 

What is unclear at this stage is if there are any tangible actions that the Chancellor can take as part of the Budget that can directly respond to these issues. I would hope and expect to see a safe and assured performance with a sensible range of measures designed to calm nerves and increase confidence rather than anything that will further rock the boat.

The second problem faced by the Chancellor is the need to fulfil the Conservative party pledge to wipe out the Budget deficit by 2020, whilst at the same time trying to honour Theresa May’s recent proclamation that austerity will soon be coming to an end. 

The Institute for Fiscal Studies estimates that in order to “end austerity”, the Chancellor will need to increase spending by around £19 billion a year between now and 2023. 

This expenditure can only be funded by either increasing borrowing (which would mean abandoning the above manifesto pledge) or increasing taxes (which would not be in keeping with traditional Conservative values). 

Mr Hammond may try to avoid confronting this issue directly by essentially deferring it until next year’s Budget. He might make the not unreasonable argument that this problem is directly tied to the aforementioned matter of Brexit and that any end to austerity will be dependent on the nature of the Brexit deal that is secured. 

He will still need to take some degree of action now, however. This may be in the form of an internet sales tax, adjustments to certain tax reliefs (e.g. entrepreneurs’ relief or business property relief), or tweaks to the pensions tax regime. 

The guiding principle is likely to be to steer clear of anything too politically incendiary, and to introduce some moderate tax increases that will be popular (or at least not too controversial) with the voting public.

Overall, however, it seems likely that, in spite of any modest tax increases, the Chancellor will struggle to avoid raising borrowing. If that happens, it will be interesting to see how he presents this, and whether the façade of progress towards ‘balancing the books’ is maintained.

ensors.co.uk