GDP forecasts leaves Chancellor’s war-chest running low - KPMG experts respond to the Budget

Posted On: 
23rd November 2017

Experts from professional services firm KPMG analyse Philip Hammond’s Budget announcements. 

GDP forecasts leaves Chancellor’s war-chest running low
Yael Selfin, Chief Economist at KPMG UK

“The Chancellor was handed a tough challenge in his Autumn Budget by the OBR in the form of a significant downgrade to UK economic growth forecasts. While the forecasts may seem somewhat pessimistic, Brexit-related challenges could see further deterioration in outlook in the short to medium term. Additionally further falls in net inward migration, beyond the ONS’s latest projections, would also reduce future long term economic growth.

“This contrasts with a pick-up in growth prospects elsewhere, with expectations for growth in Eurozone rising to 2.2% in 2017 and to 1.9% in 2018. While in the US they are up to 2.2% in 2017 and 2.5% next year, compared with revised 1.5% and 1.4% growth forecasts in the UK followed by a slight further deterioration for two years as the UK leaves the EU. 

“The downgrade to UK GDP growth forecasts has totally overshadowed the generally good news on public finances so far this fiscal year, reducing the money available to the Chancellor. However, the Chancellor is sticking to his target of reducing public borrowing to less than 2% of national income by 2020-21, albeit with a reduced chest for any emergency spending in the event the economy requires an additional boost.

“The nearly £18bn in extra spending announced up to 2022-23 had a few big winners, including housing and measures to improve productivity, such as additional money for the National Productivity Investment Fund and for Research and Development. No doubt more will need to be spent in areas such as improving basic skills and infrastructure in future Budgets if the UK is to see a significant rise in productivity performance. With stronger productivity the UK’s main route to raise future economic growth and prosperity, it is a prize worth aiming for.”

Business got what it wanted – apart from more growth
Amanda Pearson, head of tax policy at KPMG

“Business was looking for a Budget with few surprises – and, thankfully, that’s what they got.

“The Chancellor avoided introducing any further complexity into the tax system, and it is encouraging to see him use tax policy as a lever for growth and investment as we approach Brexit.

“There were measures to improve competitiveness and innovation and a commitment to continue with a competitive corporate tax environment – things business crave – but the sharp reduction in economic growth forecasts threatens to overshadow.”

Surprise R&D boost sends clear message to global businesses that UK is open for innovation
David Woodward, R&D Tax Partner at KPMG

“Increasing the R&D Expenditure Credit (RDEC) to 12% means that, net of corporate tax, the Government will contribute £10 for every £100 of R&D expenditure by business. RDEC, recognised in a company’s accounts as income, plays a key role in encouraging global businesses to choose the UK as a location for their R&D. Coupled with the £2.3bn R&D grant boost that was announced on Monday, the increase is a welcome surprise that will send a very positive signal that the UK is an attractive place for innovation.

“If the Chancellor wants to achieve the vision he set out in the Budget for Britain there are two key issues he needs to address - productivity and ensuring the UK has advanced products and services to allow it to compete in a global market, particularly following Brexit. He has quite rightly identified that the key to addressing these issues is innovation, so it is great news that he has continued to invest in both R&D grants and credits.

“We now look forward to the imminent industrial strategy white paper, which will hopefully help produce a cohesive strategy addressing the entire product lifecycle.”

UK needs to attract inward investment for tech businesses
Bernard Brown, vice chair at KPMG UK

“The announcements made by the Chancellor today only scratch the surface of what we as a nation can offer digital and tech businesses to set up shop here in the UK. With the UK preparing to leave the European Union, we desperately need to attract inward investment, from digital and tech businesses of all sizes, by introducing tax incentives and increasing investments in our tech clusters. By doing this we’ll be supporting talent, boosting productivity, and creating hundreds of thousands of good, high-skilled jobs up and down the country.

“If we are going to stay in the race for being front runners in cyber security, AI, automation, driverless vehicles and other new technologies, we really need to offer more to entrepreneurs and innovators to succeed.”

Don’t forget ‘old-school’ Tech
Tudor Aw, UK Head of Tech sector at KPMG

“The Chancellor has characterised today’s budget as one that is “fit for the future”.  In that context, it is hugely encouraging that the tech sector sits at the heart of that future.  Commitments to emerging technology such as 5G, AI and data science is to be applauded, but it is important that core technology businesses are not forgotten in the chase for the next shiny toy.  In particular, the UK has strengths in ‘old-school’ tech sub-sectors such as software, IT services and semi-conductor technology.  Tech investment should therefore be made in education, regulation, tax and other incentives to ensure our strength in the tech sector is broad based and not just those areas that sit at the top of the latest hype curve.”

Scaleup businesses should be the focus for economic prosperity
Patrick Imbach, director at KPMG

“The Chancellor’s announcement that he is doubling the Enterprise Investment Scheme allowance is a positive step in helping early stage businesses attract investment and raise finance. Not only will this help to boost investment in startups, but it potentially plugs a funding gap if the European Investment Fund is no longer available when the UK leaves the EU.

“The Chancellor is right to acknowledge that the UK is becoming an even more fertile ground for new businesses to start up, but the reality is that the scaling up of these businesses is the most difficult and important area to focus on.   It is usually at this point where lots of our startup enterprises gravitate to more supportive environments such as the United States.”

Transforming Cities Fund will help drive Northern Powerhouse, but Yorkshire in danger of being left behind
Chris Hearld, North Region Chairman at KPMG

“Investment in infrastructure has long been the foundation upon which the growth of our regional cities, and improvements in our productivity, is built.

“That half of the new Transforming Cities Fund is to be shared amongst those cities with metro mayors is good news for the two thirds of the Northern Powerhouse that have secured devolution deals.

“Indeed, it’s particularly pleasing to see the massive strides that are taking place in the North East which will be no doubt buoyed by pledges of investment in the Tyne and Wear Metro and the former Redcar steelworks site.

“However, once again the people of Yorkshire are left counting the cost of their region not being able to get its devolution act together. Being left to compete for its share of investment against the rest of the UK must surely increase the risk of it becoming a straggler in the race for economic growth.”

England’s regions get new transport funding but London and the South East miss out
Ed Thomas, UK head of transport at KPMG

“The cancellation of the Cardiff to Swansea, Midland Mainline and Lake District electrification schemes in July was met with widespread criticism in the regions. Today’s announcement of a £1.7bn Transport Fund for Local Transport priorities, £300m for rail connections into HS2 and funding for the Tyne and Wear Metro rolling stock will be seen to go some way to redress the balance. Further devolution deals in England and new city deals in Scotland, Wales and Northern Ireland could also give the nation’s major cities more levers to deliver their own transport investment strategies. However, whilst the new money will be welcomed, many will still question whether it is of the scale necessary to close the UK’s regional productivity gap and genuinely rebalance the economy.

“London will welcome the additional flexibility that full business rates retention will give it to fund and finance transport infrastructure. However, the announcement that work will continue on Crossrail 2 will be seen as a neutral statement, rather than an explicit green light for the scheme to progress to the next stage.

“There was also evidence that Government is being more explicit around the linkages between housing, transport and the forthcoming Industrial Strategy White Paper.  Building on last week’s report by the National Infrastructure Commission, a clear connection was made between the proposed additional million homes in the Oxford-Milton Keynes-Cambridge corridor and investment in new rail and road links along it. Whilst no new money was announced today, the scale of this housing ambition is likely to mean that Government will ultimately support the East-West rail and roads schemes that are under development with public funding. Previously it had been looking to purely privately funded solutions.”

Big buzz for electric cars but diesel driven out
Justin Benson, Head of Automotive at KPMG

“With the tax on diesel cars and some of the Chancellor’s proposals on electric vehicles (EV), the Government clearly wants to encourage consumers to buy more environmentally friendly vehicles. However, while EV grants go some way to making it easier to sell electric vehicles, the elephant in the room is the cost of batteries: this remains the largest single cost of new EVs. It would therefore be good to see more help for low emission technologies, such as enhancing R&D tax credits for battery and hydrogen delivery technology.

“From April 2018 any cars that don’t meet EURO6 standards will be subject to the higher tax bands, so most cars made pre-2015 will be affected. Recent reports confirm that new and used diesel cars have been reducing in price. Although this change may encourage some consumers to purchase new lower emission cars, it will mean further downward pressure on new and used diesel car prices, thereby reducing future investment in an industry already suffering from significantly reduced levels of investment due to uncertainty over Brexit.”

More can be done to get people out of working poverty
Andy Bagnall, director at KPMG

“The increase in national minimum wage and national living wage is very welcome news for those on low pay, however businesses can still do more to help those employed earn enough to escape working poverty.

“The reality is that those at the bottom of the pay scale are really feeling the squeeze due to increases in the cost of living and decline in real pay. Paying the real Living Wage allows people to afford the basics they need. As employers we can take active steps to address this.

“Paying the real Living Wage also delivers real and tangible business benefits.  In our own firm it has improved staff morale and driven a rise in service standards, improved the retention of staff and increased our productivity.

“It may not be possible or practical for everyone, but all organisations need to do what they can to address the problem of low pay. Of course, change cannot happen instantly, but making an initial assessment is an important first step.”

Increasing funding for schools is good for business
Anna Purchas, Head of People at KPMG

“Today’s announcement that the Government will provide additional funding to improve the skills of the UK’s future workforce is a step in the right direction for business.

“Investing in schools that have until now underperformed will allow organisations to gain access to a greater pool of talented young people who may not previously have had the opportunity to shine. 

“Additionally bridging the skills gap that currently exists within STEM will be a positive message for business leaders, ensuring their recruitment pipeline is fit for purpose and better allowing the UK to remain competitive post Brexit as outlined in the Industrial Strategy.

“However the emphasis must be on increasing the quality of teaching rather than just the take up numbers. Government must provide stringent guidelines to ensure this additional funding is spent in the best way to benefit the future UK workforce.”

HMRC wins more resources to close tax gap
Chris Davidson, tax director at KPMG

“Behind the headlines, there is a raft of changes in tax administration.

“The most significant in terms of the impact on Government finances is the spend-to-raise package provided by the Treasury.

“This will give HMRC £155m over the next five years to raise an estimated £2.3bn, which will be an impressive return on investment. The package is mainly targeted at closing the tax gap and should help HMRC continue to tackle all forms of non-compliance.”

Ambitious housing plans sound great but can they be delivered?
Jan Crosby, UK Head of Housing at KPMG UK

“The latest Budget has made big noises around ambitious housing plans, and yet the latest OBR statistics still forecast a rise in house prices of around 3 per cent per annum over the next five years.

“The stamp duty give away will be inflationary and just means sellers will ask for £5,000 more. Given the typical 90% mortgage available to first-time buyers, that £5,000 could provide up to £50,000 more buying power. Indeed, the cost of this likely popular measure -  at £0.5bn -  will find its way back into house prices. It pales into insignificance when Stamp Duty Land Tax receipts are forecast to move to £13.2bn this year – an 11% increase on last year.  They are expected to continue to rise to £15.8bn over the OBR forecast period - a key revenue raiser.

“Some policy ideas hint at game changing opportunities for reform if executed correctly. The Public-Private Partnership (PPP) funded Garden towns for example, must be used to deliver a completely new model of development and offer a real opportunity for true and rapid place-making, which includes multiple tenure like rental, retirement, affordable housing, shared ownership, to name just a few. This is the Asian model, and building new cities is bread and butter for Asian capital, however there must be an appropriate model to encourage rapid build out.

“Capturing more of the uplift in land value, when infrastructure is put in place or residential planning permission is granted could be transformational, if it was applied to the land owner rather than the developer.  The gains through planning are often very large and it is the land owner that benefits - not the housebuilder.  If the policy is applied post land purchase and paid by the housebuilder, there will be uncertainty and negotiations which will slow getting sites built.

“The £8bn of guarantees to help new rental accommodation and housing could create alchemy, attracting risk averse pension funds to the build to rent sector.  Taking it a step further, this could be used to create growth in discounted rental housing for teachers, nurses, police, military and other public sector workers who just can’t afford to live near their work in well-designed housing.  It could create discounted rents at 35% discount to market and would cost the Government nothing, as we described in our latest Reimagine housing piece. 

“The threat of action on land banking is clever politics, however housebuilders are not incentivised to land bank and one of the big problems is actually getting the planning system, and often multiple public sector stakeholders, to make more rapid decisions and actually grasp the nettle on complex sites.  This is perhaps one of the key areas in productivity that the Government should focus on if it wants to solve the housing crisis.”