Budget 2017: Few surprises but plenty of detail

The entrance of Philip Hammond into the exchequers seat got off to a slow start in November as he delivered a relatively uneventful Autumn Statement. Surely, five months on, his first full budget would be more compelling? Unfortunately, not. Its actually turned into a bit of a mess after he made a U-turn on the proposed changes to self-employed National Insurance contributions.

To us this was always a bit of a strange one. Self-employed people get smaller state pensions, so need to save more to get the same benefit. They also don’t get the same sickness and maternity benefits. Nonetheless, the budget was more interesting for its context rather than its content.

To start with the economics, although the Chancellor raised his growth projections for the years ahead, he was not commensurately extravagant with his spending plans, instead choosing to hold any extra revenue back for a rainy day. We think the UK economy is well placed to deal with the economic challenges that lay ahead, but nonetheless this type of conservative policy deserves a mention given the elevated level of UK government debt. He also acknowledged that inflation was coming through, expecting it to stay above the Bank of England’s 2% target until 2020. Whilst we agree it’s here now, and we think for a short period it will overshoot expectations, we do expect it to fall away quicker than the Chancellor predicts due to price competition and low wage growth. Inflation is such an odd one as it varies so much depending on your spending habits. 

So, where did he spend? In general he aimed funds at the young and the elderly through education and social care respectively. People are growing older and living longer, with less young people working to cover the tab. Better education and a new long term strategy for social care is definitely required, so it was pleasing to hear they would release a more comprehensive plan later in the year… let’s wait and see though, this is going to require immense cost over the years ahead and radical change is required.

Business owners were given a gift with one hand but had it taken away with the other. The chancellor confirmed that corporation tax would fall to 17% by 2020 but also proposed a reduction in the tax-free dividend allowance from £5,000 to £2,000 in April 2018. The former is of course good for business, but the cost of getting funds out of businesses continues to increase at levels well above inflation. As a result, this move is encouraging companies to invest to grow profits. Changing the very dividend allowance that was introduced just last year should act as a stark reminder that the tax landscape is ever-changing, requiring proactive and flexible planning.

The Chancellor also confirmed that the previously announced personal income tax allowance would increase to £11,500 from April 6^th. Moreover, by 2020, it is proposed to sit at £12,500 and consequently workers will not start to pay 40% income tax until they earn £50,000. Savers may also be buoyed by the introduction of a new National Savings & Investment bond that will be launched in April 2017, paying 2.2% gross interest per annum. This isn’t bad with cash deposit rates at all-time lows, although the maximum you can invest may be restricted to just £3,000! Sprat to catch a mackerel perhaps. The mackerel will need to be well hooked though as our research shows that the average return on £10,000 invested in premium bonds has fallen to below 1% per annum.

All-encompassing it was a relatively low key budget with few surprises but plenty of detail. The headline ‘noise’ (debate on self-employed national insurance) will once again distance us from the underlying trends; a better than expected UK economy, rising inflation in the short term, and the longer-term battle with deflationary forces. It’s a difficult landscape, but makes for a fascinating challenge in our search for sustainable, risk-adjusted investment returns and proactive tax planning.