- Intergenerational fairness to be a key theme of Budget
- Northern Ireland growth continues to lag other UK regions
- Unlikely to see moves to make devolved Corporation Tax go live in NI
- Chancellor may look to freeze higher rate tax threshold
- Little prospect of significant legislative change
Wednesday’s Budget will be the first official Budget to take place in autumn for more than 20 years. If the Chancellor keeps his promise to stick to one major fiscal event a year, it will also be the penultimate Budget before Brexit. That means just two bites of the cherry to ensure we have a ‘Brexit-fit’ tax system and to set out a fiscal vision for the UK’s future outside of the EU.
A post-election budget might normally be considered the time to raise taxes, with giveaways kept back until closer to the public next going to the polls.
But the Chancellor faces the challenges of an impending Brexit and a minority Government. While our recent polling suggests that people would be prepared to pay more tax for key public services, the Chancellor will be mindful of the failure and fallout from the recent attempt to increase reform around National Insurance contributions for the self-employed at the last budget.
While significant new legislation is unlikely, there is nothing to stop the Chancellor giving more clarity around a proposed direction of travel to address issues such as the productivity gap, intergenerational inequalities and housing.
So what can we expect?
The economy – how will Northern Ireland fare?
We project UK growth to slow gradually from around from 1.8% in 2016 to around 1.5% in 2017 and 1.4% in 2018. The slowdown will be felt across most major industry sectors, although manufacturing exports may receive a short-term boost from the depreciation of the pound and stronger Eurozone growth.
The forecast slowdown in UK growth will be primarily a result of a slowdown in consumer expenditure, with real spending power squeezed as consumer price inflation increases faster than earnings growth.
Northern Ireland is expected to end the year with annual growth of around 1.1%, the lowest of all 12 UK regions and well below the UK average of 1.5%. Looking to 2018 and, while London has generally had one of the strongest growth rates of any UK region, our latest projections suggest London’s growth rate may fall to close to the UK average of around 1.4% in 2017-18.
This is partly due to the greater exposure of some London activities (e.g. the City) to adverse effects from Brexit-related uncertainty, as well as growing constraints on the capital in terms of housing affordability and transport capacity. Most other regions are projected to expand at around the UK average of 1.4% in 2018, although Northern Ireland is predicted to lag behind somewhat with growth of around 1% next year.
Dr David Armstrong, partner with PwC in Belfast said:
“Northern Ireland is currently the lowest-performing UK regional and that is not projected to change in 2018. That’s despite a remarkable recovery in employment and a steady fall in unemployment over recent years.
“The problem is that other regions have created more jobs more quickly and have tapped into their hidden labour resources, while in Northern Ireland economic inactivity has actually risen.
“Low productivity overall, a regional export market that concentrated amongst a handful of larger companies and wages that have failed to keep pace with inflation complete the reasons why we are trailing the rest of the UK.
“We’re hoping the Budget will deliver some incentives to boost productivity as well as looking to the Industrial Strategy White Paper, due next Monday, which will cover the UK’s so-called Grand Challenges attended to address a number of global trends, including: artificial intelligence and the data economy.”
Janette Jones, tax partner at PwC in Belfast said:
“The Chancellor seems to be handcuffed by both the politics of Parliament and the lack of money to play with, so he will need to box clever to make an impact.
“Targeted, low cost, simple but popular tax changes are the nirvana he will be shooting for… if only it was that easy.
“Some areas he may focus on include intergenerational fairness where the Chancellor will be seeking out ways to help younger taxpayers. Tax breaks for the young, funded by cuts to pension tax relief have been suggested, but more likely are amendments to the Lifetime ISA which was launched in April aimed at people under 40. Boosting the amount that can be saved each year, and allowing savers to make withdrawals without incurring harsh penalties would make the product more appealing to young savers while those looking to get on the housing ladder may benefit from increasing the age for eligibility to up to 50.
“Student loans may also feature and we may see a softening of tuition fees or, to make a real difference, even a transition away from the current debt system towards a progressive graduate tax.
“The Government will also be looking for ways to raise money and the possibility of a freeze on increases to the tax free allowance and higher rate tax threshold lingers. In particular, he may decide to freeze the rise of the higher rate threshold in return for an increase in the lower earnings limit for national insurance.
“Further restrictions to salary sacrifice arrangements might also be on the cards and could National Insurance contribution savings for those who pay into their pension through salary sacrifice now also be under threat?”
The Government has been committed to reducing corporation tax to 17% by April 2020 (it currently stands at 19% - the lowest in the G20). However, speculation abounded when HM Treasury did not dismiss out of hand a recent OECD suggestion to reverse the planned cut and target the additional funds on solving the UK’s productivity puzzle.
Northern Ireland’s long-awaited devolution of Corporation Tax is now looking increasingly remote and certainly won’t be fully in place by the middle of 2018 as originally proposed. In addition, as the UK rate has fallen sharply to the proposed 2020 level of 17%, the difference between that and 12.5% may not be enough to boost Northern Ireland’s international competitiveness.
Stella Amiss, head of tax policy at PwC, said:
“At a time when it’s crucial that the UK remains attractive to investors, it seems unlikely that the Government will veer off its chosen path to reduce corporation tax to 17% by April 2020.
“We therefore expect the Chancellor to stick to the planned reduction. If this was to be reversed it risks signalling that the Government is not committed to supporting business taking a longer term view.”
A recent PwC survey found that 43% of people consider the implications of stamp duty before buying a property. Despite the recent removal of the ‘slab system’, which cut stamp duty for those buying homes under £900,000, further changes could be on the cards.
Rob Walker, head of real estate tax at PwC, said:
“While, in theory, 95% of buyers were winners from the removal of the slab system, the increase in stamp duty for homes above this threshold appears to have contributed to an overall slowdown in the property market. High stamp duty rates are dissuading people from upsizing and downsizing - affecting both ends of the market.
“The Government has indicated that it will focus on affordable housing but the entire market is linked through chains. Impeding homeowners’ ability to move negatively impacts a flexible labour market.
“The Government will need to weigh up whether the rates of stamp duty have now exceeded the tipping point which results in transaction volumes falling to such an extent that revenues actually decline. The market has cooled considerably in the last six months.”
The approach to taxing the digital economy is currently under review by the OECD, UN and EU. HM Treasury is actively participating in these discussions and has indicated that the UK will consider amending its taxation framework to address growing digital activity within the UK economy, particularly in relation to UK taxable presence and VAT.
Alenka Turnesk, partner at PwC, said:
“The UK is expected to align domestic legislation with proposals from the OECD and EU.
“However, these are not due to be released until spring 2018 so it’s unlikely that we will see any significant changes to taxation of tech companies in the Budget. Due to the global nature of many of these companies, for any changes to be effective, they would require more international agreement and likely changes to the OECD model double tax treaty.
“The Treasury may consider relaxing the rules that prevent tax relief for goodwill, customer relationships and data - all three of which are recognised as creating value in the digital economy. These rules could well be revisited and reconsidered as part of the wider digital taxation legislation package.”