Trick or treat? What will probably be in the 2018 Budget – and what ought to be

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Find out what was accurate about this forecast – and what wasn’t – by tuning into Radio 4’s Today programme on Monday morning. City-REDI’s Professor Simon Collinson will be one of the guests, discussing the budget and what it means for the country in what promises to be a tumultuous year ahead.

There’s been plenty of speculation around what to expect from the budget next Monday, especially since Theresa May called for an end to austerity a decade after the 2008 financial crisis and the subsequent public bailout of failed banks. The 2018 budget has been brought forward from Wednesday, possibly to avoid the inevitable Hallowe’en references (not dissimilar to the one in the title of this blog post). The context is tough: Brexit is taking up almost all of the government’s policymaking bandwidth, with the civil service straining to prepare for the UK’s exit from the EU early next year. Here are a few predictions about what to expect, along with a wish list of what the Chancellor ought to do to help the UK’s cities and regions tackle their own problems.

The government has already promised to increase NHS spending by 3.4% annually over the next five years. How this will be paid for – whether through tax rises or cuts in spending for another department – will become clearer next week. Additional funding for the health service is a welcome relief as we enter the challenging winter period. However, the amount promised may still not be enough, with the British Medical Association warning that billions more are needed to cope with the crisis the NHS now finds itself in all year round.

Given the attention at the party conferences to the challenges Britain’s high streets face, with Debenham’s being the most recent big name to be in trouble, it is likely that Philip Hammond will have something to say on the issue. No major change to business rates or regulation is expected but the Chancellor will probably announce a consultation or a status report on the current state of the high street. What will be interesting is whether there is anything in the budget about making online retailers pay more tax to level the playing field between physical and digital vendors.

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There is expected to be some changes to taxation, such as an extension of IR35 rules to the private sector, tightening the tax relief on pension contributions and some talk around lowering the VAT registration threshold to bring some of the 3 million unregistered businesses within its scope. This third policy would be rather challenging to implement at present, given the lack of capacity in Whitehall to implement it as well as the logistical headache it would present, both for HMRC’s new digital platform and also for businesses with no experience of submitting VAT information online. There are also question marks about whether the government will follow through on its pledge to reduce corporation tax from 19% to 17%; it’s unlikely a further drop at this point would affect international investment decisions while the uncertainty of Brexit still haunts the UK economy.

Perhaps the most surprising announcement is that Theresa May now says that austerity must come to an end. This is a response to the anti-austerity argument Labour is making to its base in places that the Conservatives are also targeting, such as Walsall and Mansfield. Analysis from Deloitte claims that the UK’s continued budget deficit over the past nine years demonstrates the scale of the damage inflicted by the financial crisis. However, even on the government’s own terms of balancing the budget and paying off the deficit, austerity has failed. The UK’s national debt has increased from £770 billion in 2010 to £1,763 billion in March 2018. What’s more, according to the ONS the current budget deficit stands at £40.7 billion per year, meaning that the UK’s public finances are quite vulnerable as we move into the implementation phase of Brexit. This budget is taking place against a backdrop where the Conservatives’ internal divisions have reached fever pitch, with the distinct possibility that MPs from Theresa May’s own party could vote it down in a show of strength, especially given the animosity the pro-Brexit European Research Group faction of her party has shown to how negotiations with the EU are playing out. It’s therefore rather difficult to see what the end of austerity will actually look like in practice.

We turn now to a few things that would help the UK’s cities and regions cope in the year ahead. As Professor Raquel Ortega-Argilés discussed at City-REDI’s fringe event at the Labour Party conference, contingency planning for Brexit at the local level is largely ad-hoc, with a real shortage of joined-up public policy responses despite the major risk it poses, particularly to the economically-weaker places that voted for Leave in the 2016 referendum. Further devolution of power away from Westminster to the new combined authorities would help with this kind of strategic planning, especially given that the central government’s policy agenda is entirely consumed by delivering Brexit. Andy Burnham, the Mayor of Greater Manchester, said recently that ‘the country urgently needs to rebalance… [and recognise that] the engine of the global economy is the city and city region’. What the government will do to further extend the powers granted in existing devolution packages will be interesting to see, as well as any updates on finalising a couple of the other proposed ones, such as the Cheshire and Warrington deal or the controversial One Yorkshire proposal.

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In recent months, local government funding has been in the spotlight, with the high-profile collapse of the Conservative heartland Northamptonshire council, which has effectively gone bankrupt. Several other councils are also reported to be on the brink, most notably another true-blue stronghold, Surrey. Were it not for Brexit this would be much higher up the government’s priority list, especially given the political composition of the most at-risk local authorities. Easing the cuts to councils and giving them greater flexibility in council tax rises (as well as the possibility of holding on to the proceeds from any changes to business rates) would be one way of the government tackling this. A recent report from the National Audit Office showed that funding for local authorities has been reduced by 49.1% in the period 2010-2018 alongside rising demand for services, above all for social care. That these deep cuts are coinciding with an ageing population is causing serious problems for councils in meeting their statutory obligations on providing social care, libraries, waste disposal, and so on.

Related to this, concerted effort to tackle the very visible growing numbers of homeless in the UK’s towns and cities, as well as action to address the neo-Dickensian return of people relying on food banks, would be a welcome sign that Theresa May still has the appetite to fight against the “burning injustices” she referenced upon becoming Prime Minister. There are 50% more people without a place to live since 2010, with a report from Shelter estimating at least 307,000 do not have a place to live. This is coupled with a genuinely disturbing explosion in the number of people relying on food banks to survive – just under 600,000 are now dependent on emergency food aid according to the Trussell Trust, compared with around 100,000 in 2012. That wealth inequality has reached this extreme level so quickly is worrying. This is a structural problem that must urgently be tackled through the government adopting (or devolving powers and funds to adopt) inclusive growth measures like those proposed by City-REDI. In doing so, there lies the opportunity to restore the public’s faith in government after waves of populism and protest have rocked the body politic in the past few years.

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The list of major problems that urgently cry out for a resolution but are crowded out by Brexit could go on. The roll-out of Universal Credit should be paused and the policy reworked before it causes further harm, with evidence showing that in its current iteration it is pushing vulnerable claimants into debt and destitution. Ten years on from the crisis, one in four children in the UK are now living in poverty, with two-thirds living in households where at least one parent works. Given that work on intergenerational earnings elasticity essentially shows that social mobility is becoming more difficult as wealth inequality in the UK increases, the implication is that without serious action children’s life chances will increasingly be decided not by their abilities and potential but rather by their background and family income. This is before we consider the affordable housing crisis, rise in health problems linked to worsening air pollution, collapse in public transport funding, and the skills shortage, with the CIPD warning that the UK is ‘sleepwalking into a low-value, low-skills economy‘. Many of these problems would be more effectively tackled at the local level, where the understanding of the issues communities face and the needs they have is greater. The combined authorities are a better means for responding to local problems and opportunities than central government departments which are spatially and culturally removed, even before Brexit drained them of capacity to act. The combined authorities need greater spending power, and they need it now. If the government is serious about being bold and enabling the UK to seize the opportunities of Brexit, it should unleash the energy and determination of the UK’s cities and regions to “take back control” of their own destinies.

This blog was written by Liam O’Farrell, Policy and Data Analyst, City-REDI, University of Birmingham.

The opinions presented here belong to the author rather than the University of Birmingham.

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