In World Economy News 14/11/2016
Five months to the day after Britain voted for Brexit, its finance minister will outline how the government plans to cope with the economic fallout and voters’ frustrations which had echoes in Donald Trump’s U.S. election triumph.
Philip Hammond, the Chancellor of the Exchequer, is due on Nov. 23 to announce spending and tax plans until the end of the decade in his first budget update since taking office after the June vote to leave the European Union.
His speech to parliament is likely to build on Conservative Prime Minister Theresa May’s pledge to serve families that are “just managing” — a response to discontent with the political establishment and income disparity that was exposed by the referendum.
Her promise leaves Hammond with a difficult challenge: how to ease the squeeze on living standards and reduce inequality when the public finances are deep in the red and the economy is likely to slow sharply next year, reducing tax revenues.
Hammond has hinted at more spending on infrastructure, building more homes and giving companies incentives to overcome their Brexit nerves and invest.
But after a decade of stagnant incomes the issues of living standards and inequality are at the top of the agenda — as in the United States and other European countries.
“You ignore the distribution of income at your peril,” said John Llewellyn, a former global chief economist at Lehman Brothers who now runs a consultancy, Llewellyn Consulting and is on the advisory panel of Britain’s independent budget office.
“It doesn’t affect political outcomes one year to the next. But, as we have seen, it can produce very big outcomes. It creates a sense of injustice and we know that always ultimately bites hard,” he said.
Trump’s victory in the U.S. presidential election on Nov. 8 was an illustration of what can happen when voters lose faith in their politicians and feel left out.
A political novice who has not held elected office, Trump rode a wave of anger towards Washington insiders, promising to create jobs, revive the economy and “make America great again”.
Hammond, who was foreign minister under the previous prime minister, David Cameron, will have taken note.
A TEST FOR THE GOVERNMENT
Hammond has no shortage of priorities after the vote to quit the EU, which has increased economic uncertainty in Britain though May has yet to launch the formal process for leaving the 28-nation bloc. She says she will do so by the end of March.
The immediate impact of the Brexit vote has not been as severe as many economists warned.
But inflation is likely to rise to around 3 percent or more next year, outpacing growth in pay, because the pound has slumped since the June 23 referendum.
The Bank of England expects economic growth in 2017 and 2018 of 1.4 and 1.5 percent respectively, half the average pace of the 10 years before the global financial crisis.
But May has made helping the “just managing” families a top priority, and Hammond’s speech will be used by opponents, voters and interest groups to gauge her commitment to her promises.
“While the choices are hard, what appears clear is that the Chancellor does have options: the extent to which he utilises them will go a long way to determining just how serious the government’s focus on the ‘just managing’ is,” the Resolution Foundation, a think tank which works on issues facing lower-earning households, said in a report this month.
The main way that Hammond’s predecessor as finance minister, George Osborne, tried to help households cope with slow earnings growth was to increase the threshold at which workers start to pay income tax, and to raise the minimum wage.
James Dowling, a former British Treasury official who worked on budgets, said Hammond might be tempted to accelerate the pace of raising the threshold for paying income tax.
“I can see how that would fit into the narrative,” Dowling, who is now head of public policy at consultancy Lansons, said.
A less expensive alternative would be to cut fuel duty or “sin taxes” on beer, wine, spirits and tobacco, something the government could do immediately without having to wait for the new financial year to start in April, he said.
The Resolution Foundation urged Hammond to take a more targeted approach by reversing planned cuts to social security benefits for people who are in work but on low wages.
POLITICAL RISKS
Osborne last year restricted access to Britain’s expensive tax credits system, which tops up the earnings of workers on low incomes, and froze working-age benefits for four years in 2015.
Along with the effects of a weaker economy and the higher inflation that is likely after the pound’s slump, the changes mean the incomes of the poorest two-fifths of households could shrink between now and 2020, the Resolution Foundation said.
To help pay for easing problems of those in low-paid jobs, Hammond could freeze the 2017 rise in the income tax allowance threshold — the benefits of which will go mostly to higher earners — and drop a plan to cut corporation tax, it said.
Looking further ahead, Britain’s new government could rethink the way it raises state pensions each year — something recommended this month by lawmakers — and take bolder action to try to address one of the biggest squeezes on families, the high cost of buying or renting a home.
Britain launched a 5 billion pound ($6.30 billion)homebuilding stimulus package last month, its latest attempt to address a chronic housing shortage.
But Vince Cable, who served as business minister in the coalition government of 2010-2015 when he was a Liberal Democrat lawmaker, said the scale of the problem required an overhaul of Britain’s taxation system which, he said, favours home-owners.
But radical change would be so unpopular with many voters, it could end the political career of any finance minister who tried it, Cable told a panel discussion on Hammond’s tax options organised by the Resolution Foundation.
“You’d need to be protected by a military government,” he said.
Source: Reuters (By William Schomberg, Editing by Timothy Heritage)
