PwC on the Budget Aftermath: Part Two

In his Budget speech yesterday, chancellor of the exchequer, Philip Hammond, very briefly touched upon the likely possibility of the Spring Statement becoming more of a Spring Budget. In many ways, this does raise the question: did the Autumn Budget achieve any lasting long-term solutions?

Continuing on from Part One, PwC leaders have continued to provide their insights into what was announced in the House of Commons.

Stop-gap measures for SMEs and retail

Phil Vernon, head of rating at PwC, commented that “the chancellor’s decision to focus his attention on small business will be welcomed by many.”

Nonetheless, he went on to add that “it doesn’t address the fundamental issue of the current business rates system – the high main tax rate.”

He continued: “By announcing a cut in business rates by a third for all retailers in England with a rateable value of £51,000 or less, the chancellor has again tinkered around the edges of the system without addressing the need for a reform to make it a suitable local tax for modern business.”

A retail partner at PwC – Jacqueline Windsor – focused in on the effects for retailers. She said: “Retailers face more structural industry challenges, with the ever-growing shift to online shopping having severe implications for retailers’ delivery and returns services, and their legacy stores on the high streets.

“Today’s announcement will give some breathing space for retailers to reflect on how to evolve, innovate, and transform themselves to be fit for the future.”

The idea that the chancellor has provided the retail and general business sectors with “breathing space” is something that could be applied across a multitude of sectors. Hammond has provided enough investment to provide short-term solutions but, with the threat of a potentially no-deal Brexit, the long-term could be wrought with complications.

On the subject, Vernon concluded: “The announcement also totally overlooks larger businesses, which are repeatedly highlighting business rates as a high stress area affecting the high street, and will do nothing to stem the closures of larger high street stores. Long-term reform is crucial, not just for business, but for local government who rely on a consistent revenue stream to provide high quality local services.”

How is the UK economy looking?

John Hawksworth and Mike Jakeman – chief economist and senior economist, respectively – have provided more general insights into the potential for the economy.

Hawksworth said: “The chancellor has used a significant borrowing shortfall this year, driven in large part by higher than expected tax revenues that the OBR expects to persist into future years, to help fund higher public spending in the NHS, without significant net rises.”

Short-term modest tax cuts were also announced through the acceleration of income tax allowances and thresholds, as well as freezing fuel, beer, cider, and spirit duties.

In Jakeman’s opinion, “the most disappointing aspect of the Budget [was] the economic forecasts made by the OBR, which expect growth to average around 1.5% over the next five years.”

“This is not much faster than the 1.3% that we expect for 2018 – when the economy is being held back by Brexit-related uncertainty,” Jakeman continued. “If these forecasts materialise, much greater efforts will have to be made on how to raise the rate of economic growth in the coming years.”

Hawksworth stated: “Projected public borrowing in the medium term has been left largely unchanged from forecasts in March. Effectively, the government has chosen to spend the fiscal windfall given to it by the OBR, rather than bank it.”

The chief economist pointed out that, “had there been no change in tax or spending plans in the Budget, the chancellor might actually have achieved his target of eliminating the deficit entirely by 2023-24, but now there is still projected to be a £20bn deficit in that year.”

The chancellor has predicted that we can expect to see a 1.2% growth in “day-to-day departmental spending” annually “over the next Spending Review period.” Although Hawksworth considered this to be largely a positive, “it is still less than projected economic growth and, after taking account of planned rises in spending on the NHS, defence, and overseas aid, there could still be some departments and local authorities that face further real cuts in departmental spending.”

It will be interesting to consider the full details revealed in the Spending Review next year, as that should provide a more definitive outlook on the Tory pledge to bring an end to austerity.

Environmental Tax

Considering the hundreds of warnings by experts over the years of the ever-encroaching danger of climate change, it seems the UK will finally be taking more action.

Jayne Harrold, PwC’s UK environmental tax leader, has said that “the introduction of a new tax on the manufacture and import of plastic packaging with recycled content of less than 30% is a welcome move in promoting a change of behaviour to encourage the redesign of packaging and promote the use of recycled material.

“The measure is planned to take effect from 1 April 2022, this three-year time lag is to give businesses time to adapt and redesign their products.

“Given the broad public support for plastic tax measures, it’s a surprise to see rejection of visible consumption taxes on targeted items which are used on the go – the infamous latte levy. This seems like a missed opportunity to lead the pack and stimulate change.

“The chancellor says that an incineration tax remains an option in the future if the proposed measures don’t deliver on the government’s ambition for change. However, given the lack of existing plastic recycling infrastructure in the UK, it remains to be seen whether the proposed reform of the Packaging Recovery Note system will be sufficient to promote the necessary change or whether an incineration tax, or other measures, will also be necessary.”

Harrold warned that “caution needs to be exercised [when] formulating [these] measures, as an increase in disposal prices would adversely impact local authorities and UK businesses. Being determined to be the first generation to leave the environment in a better state than we found it as a worthy ambition, but one that will come at a cost.

A summary on tax changes

Head of tax at PwC, Kevin Nicholson, has stated that, despite the fact that the Budget “covered a vast amount of ground, with a net tax giveaway of just over £5bn, the chancellor has left the door wide open for another major fiscal event in the spring.

“Despite pledging to haul our creaking tax system into the digital age, the announced digital service tax was little more than a nod in this direction. Ultimately, another new tax is merely a ‘sticking plaster over the cracks’ of a system that needs a fundamental reform to keep pace with modern ways of working and doing business.”

Nicholson concluded: “If this was a Budget that sought to give a little something for a lot of people, then you could say that the chancellor has gone a long way to meeting his objective. This was a Budget that was sprinkled with giveaways and a mini crowd-pleaser or two.”

How these changes will stand in the face of increasing pressure in the form of huge changes remains to be seen.