Brace for a no-deal Brexit budget

It is 19 March 2019, and the run-up to Brexit has not gone well. We are facing a no-deal exit in 10 days’ time. It’s time for the government to show what ‘taking back control’ looks like.

The UK Withdrawal Agreement was voted down twice by parliament as Conservative rebels, Labour and the DUP refused to bolster the government’s minority. Attempts by Labour to force a general election failed due to the Fixed-term Parliaments Act lock. And the last hope of a Brexit postponement, a hearing at the European Court of Justice on the right of the UK to unilaterally rescind its Article 50 exit, was spurned by European judges. So, by automatic operation of the law, the UK leaves the EU on 29 March 2019 with a no-deal exit.

Chancellor Philip Hammond has therefore announced an emergency Brexit budget with just 10 days to go. Now that the pound as dropped below parity with the Euro, and is just 10p above 1:1 with the dollar, he needs to come-up with some big ideas that show he knows how the UK can survive and thrive with a hard Brexit. Here are some of the crisis measures he may present.

• A temporary cut in VAT from 20% to 17.5%, injecting over £12billion into shoppers’ pockets. This would mirror Labour’s Alistair Darling’s one-year cut in 2008/9 at the height of the financial crisis. The great advantage of such a tax stimulus would that it could be imposed overnight, with companies having to manage the re-calculations and pricing. However, as the Labour cut showed, little of the tax saved was passed onto the consumer. Most of it was retained by retailers and acted as a subsidy for that sector. This may be a good thing: the Chancellor will want to avoid further morale-draining headlines of big-name retailers going under.
• Unilaterally slashing import tariffs on consumer goods and food. On leaving the EU’s customs union, the UK will be free to set its own import tariffs and duties regimes. It would however have to treat all countries, EU and non-EU, equally under World Trade Organisation rules. The Chancellor would want to use a tariff cut as a quick and clear demonstration of virtues of the UK’s post-Brexit status as a free-trade leader.
• Extend the corporation tax rate cut to 15%. The UK is already committed to a rate cut from today’s 19% to 17% in April 2020. This will make it the lowest in the G20 countries. But the Chancellor will want to launch a rebranding of the UK as the low-tax ‘Singapore’ of Europe. He will now be looking to exploit the lack of uncompetitive harmful tax restrictions that the EU failed to impose on the UK with the hard Brexit. This will involve making the UK a highly efficient tax destination for international holding companies and investment holdings. However, the UK is actually prohibited from aggressive tax avoidance measures through its participation in the OECD BEPS program. Aside from lowering the corporation tax rate, this could be further sweetened to include some future beneficial free trade agreement with the EU to give an advantage to offshore businesses seeking easy access to the EU’s 450m+ consumers.
• Postponed import VAT accounting. This £7billion measure was already mooted in the 2018 no-deal guidance notes as a cash-flow relief for importers.

Reassuring the markets that the numbers add up

At this point, the financial markets have already largely priced in to currencies and UK debt the effect of a hard Brexit. But the Chancellor will have to show that his emergency stimuli announcements are not going to send the deficit backwards after good progress in the past year. He will bring forward a number of initiatives to demonstrate this, including:

• Ending of higher rate pension relief. This has long been suggested, but only a Brexit crisis would be big enough to endure the backlash from Conservative party loyalists. It would raise at least £10billion, and play well politically since most of the tax subsidy goes to just a few, well-monied tax payers.
• Reversing the early personal allowance rise. In the October 2018 budget, the Chancellor brought forward by one year a planned 2020 rise in the personal allowance to £12,500. Given the working assumption there was a negotiated EU-departure, it could be spun as sensible economics to stall this measure to help fund the extra incentive measures.
• Ending Entrepreneurs’ Relief. This lowered capital gains tax relief has always been suspect on the basis that it rewarded entrepreneurs once they exited businesses, rather than incentivising them to enter into new ventures. It costs over £2.7bn per annum.

Whichever measures – spending and savings – the Chancellor opts for in the face of the no-deal Brexit, they will have to each run well into the billions. Otherwise they will lack the impact to counter the massive shock facing the country in 10 days. And, perhaps more importantly, they could fail to convince the markets and the UK people that someone is in control now.