“What’s in the box?” – it’s Budget time again

“What’s in the box?” It’s an iconic line from seminal ‘90s video nasty Seven. A youthful Brad Pitt doesn’t know exactly what’s in the box, but he’s pretty sure it has life-ruining implications.

For some unknown reason, this is also the film quote that springs to my mind, unbidden, every time a chancellor stands up to give their latest Budget speech. I’ve clearly seen far too many of them (Budgets, not video nasties).

So what present does Philip Hammond have for us in his little red box this week?

Budget 2017: good news – the public finances are merely woeful rather than utterly appalling

The good news ahead of Philip Hammond’s Budget on Wednesday is that things are much better than most people had expected at this point.

The act of voting to leave the European Union has not ended the world as we know it. (You can throw in the epithet “not yet” here, if it makes you feel more cheerful.)

The Office for Budget Responsibility (Britain’s new-ish independent budget watchdog) will be revising up expected growth for this year from 1.4% to 2%. There will be plenty of gloom attached still, of course – higher inflation, squeezed spending. But it’s rain tomorrow, rather than today.

So despite the fact that Britain is still spending more every year than it raises in tax (in other words, we’re still in deficit), there’s a sense among some pundits that the chancellor now has a pot of spare cash sitting somewhere that he can just spend on something.

It’s an interesting way of thinking. Say you were defusing a time bomb, and thought you had five minutes to do it in, but when you check the timer, it’s actually six minutes. Would you use that “extra” minute to stop for a cup of tea, or maybe to get on with the job in hand? Hopefully the latter.

So maybe the sensible thing to do with any fiscal breathing space we’ve somehow clawed back is to hang on to the money. And to be fair, that seems to be what Hammond is planning to do.

However, that doesn’t mean that he’ll be sitting on his hands in this Budget. Hammond has decided to cut down to one Budget a year – after this year. He’s said that the big tax changes will be made in autumn, and that overall it’ll be less disruptive than past Budget systems.

That makes a lot of sense. But it also means he might be tempted to float a lot of trial balloons this week. It also means that he can take the time to look as though he’s addressing a few headline issues without necessarily doing a lot about them.

On the “this needs fixing” side, the two big issues that are coming up over and over are social care and small businesses. Small businesses in certain parts of the country, and in certain sectors, are being hammered by business rates (read more about it in our briefing here). He’s likely to give them some sort of relief.

As far as social care goes, he’ll provide some sort of emergency pot to deal with “bed-blocking” crises in various parts of the country. But then we’ll get a “review” of how to fund social care in the longer term.

An infestation of men with beards

So where’s the money going to come from for the emergency measures? The obvious target appears to be the self-employed. Apparently, one in seven people – nearly five million – now work for themselves. That is a rise of 45% since 2000, reports the Financial Times.

Commentators will tie themselves in knots trying to explain this rise in self-employment. They’ll cite everything from demographics (more old people in the workforce, looking for flexible roles) to the “gig” economy (flashy tech companies trying to evade various regulations by pretending that they don’t really employ staff, just freelancers who happen to work solely for them).

But the real issue is tax treatment. Basically, self-employed people get to keep more of their income. Those who set themselves up as companies get to keep even more of it.

The Office for Budget Responsibility reckons that an employee with an income of £30,000 a year could save £3,300 in tax by incorporating (assuming it was possible) and a couple of thousand by simply being self-employed.

The Institute for Fiscal Studies think tank reckons that an employee on £100,000 a year would pay £7,365 more in tax than a self-employed person, and £8,035 than someone set up as a company.

That’s all the explanation you really need for the surge in self-employment. If fiddling a definition will net you thousands of extra pounds a year, then that is a major incentive to do so. Particularly if tribes of accountants are running around getting paid to find these loopholes for people.

These loopholes were, of course, created or encouraged by a previous government. Back near the start of the New Labour days, then-chancellor Gordon Brown was trying to encourage people to start their own businesses. One way of doing so was to cut taxes on small companies.

When you set a target as a government to encourage more small business start-ups, then the honest truth is that you don’t really care whether people are really setting up new businesses, or just re-badging existing activity in order to take advantage of better tax treatment – as long as the line on the graph is going in the right direction, you can point to it and say: “Look at all of these new small businesses! Enterprise is thriving!”

Eventually, people start to notice that there aren’t loads of new small businesses – there are just workplaces infested with bearded consultants and guys in their mid-50s who used to work for the company, but are now “freelancing”, despite doing exactly the same job as they did before.

By that time, the government has changed, and the new government points to the awful injustice of all these jargon-spouting men with beards having to pay less tax than “honest, hard-working families”. And thus the crackdown begins.

Of course, the problem is that once you’ve set up these various loopholes, they become entrenched in the system. The apparent iniquities that then arise as the direct result of political gerrymandering are then very hard to reverse without creating a tribe of angry losers who won’t vote for you anymore.

So it takes a politician with some spine to simplify the system. Most opt to put another layer of loopholes on top. One that makes things so complicated that no one really quite knows whether they’re losing or not, and by the time they find out, no one else cares.

I’m hoping that with the opposition in meltdown and another election way off in the distance, Hammond is the sort of chancellor who can demonstrate that sort of spine. But I’ll reserve judgment on that until Wednesday’s over and done with.

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