A ‘straightjacket’ Budget: Pay, Tax Avoidance, Welfare and Assets

March 11, 2016 at 09:01

Next week the Chancellor has to stand up and deliver his 8th Budget and it promises to be an interesting affair. If the last Spending Review saw the Chancellor play Father Christmas, this time the Chancellor may need to tap into his Dickensian side and summon up his inner Scrooge.

My colleague, Anjelica Finnegan, has laid out in detail the issues concerning charities. But what hints do the economics data give us for what the Chancellor may do next Wednesday?

The Great British Pay-Rise already seems to be collapsing…

You probably remember last February when the Prime Minister told the British Chambers of Commerce that Britain needs a pay rise. 2015 was a good year for British workers, with pay rising by 3.3% – and Oxford Economics has forecast a rise of 3% for 2016 – a slight slowing but still above long term trends.

Yet like so many cakes on that cooking programme everyone seems to like, the Great British Pay-Rise is already looking like it may collapse. The Bank of England has cut its forecast for wage growth in February and some economists are now predicting that wage growth could slow to as little as 2% in 2016. This comes on the back of so many false dawns in the last Parliament.

What does this all mean? As the Institute of Fiscal Studies has pointed out if wages don’t grow faster enough the government will have a £5bn black hole in its budget. This will eat away at the deficit reduction target and potentially open up the need for more cuts. This means that the breathing space that charities thought they had in November could be sucked away in March.

He may also need to plan more (or faster) tax cuts in order to make sure that workers don’t feel the need to tighten their wallets (and undermine economic growth).

Charities need to have fingers-crossed that the Office for Budget Responsibility’s forecasts on wage growth remains optimistic.

Tax avoidance revenues are trickier to find than first thought…

Usually when a Chancellor wants to come up with some money, he’ll come up with a range of ‘tax avoidance measures’. The Government is already committed to generating £3.6bn in additional revenues by 2020-21. But the OBR’s assessment in November 2015 found that while some anti-avoidance policies had exceeded their original expected yield, on average the original costings had overestimated the true revenue yield.

So there is a big potential risk that the Chancellor may not get as much revenue as he needs to reduce the deficit. This may lead to more anti-avoidance measures in the Budget in order to avoid the risk of generating less revenue than he needs to meet his deficit reduction plans.

In our work with charities, we have heard that charities are facing more frequent audits as the taxman tries to clamp down on avoidance. Although we all want to clamp down on avoidance, more frequent and detailed audits are adding costs for all organisations, including charities. Charities are often seen as soft targets by tax inspectors, so if the Chancellor tries to squeeze more revenue out of avoidance, expect to see this pressure increase. We also shouldn’t put it past the Chancellor to try and clamp down on avoidance through charities; remember the ill-fated attempt to redefine charities for tax purposes in order to cut down on tax avoidance? We’ll need to be on guard.

Will the government end the welfare cap?

This is one of those “Questions to which the answer is no” (© John Rentoul). The welfare cap is a flagship government policy and it isn’t likely to be abandoned.

But the Government has admitted in the Spending Review that it is going to breach the cap over the next three years because it has decided to reverse planned cuts to tax credits. This does beg the question, if it so easy to breach the cap, what is the point of keeping it?

However, the Chancellor could be forced into further welfare cuts in order to cut down the deficit. The Government has chosen to freeze benefits in cash terms – but this now brings a new danger, inflation risk.

If inflation is lower than expected, then tax revenues are going to be lower in cash terms. But the cash freeze means that benefit spending will not go down to match the fall in revenues. This means that in a low inflation environment, freezing benefits in cash terms would have a negative impact on the Budget. Inflation is still edging at close to 0% and prices don’t seem likely to rise significantly anytime soon. The Chancellor may have to go back to the drawing board. Further welfare cuts would have a big impact on charities’ beneficiaries.

The welfare cap then becomes a useful tool in this situation, creating a need for urgency in order to keep down the cost of welfare (which is unpopular with voters) rather than as a tool for deficit reduction.

Could we see more fire sales of government assets?

A favourite tactic of Conservative governments when it is tough to balance the books is asset sales. The Chancellor has already made great use of this approach, and is only thanks to quick sales in assets that over the next few years that he has been able to bring the level of public sector net debt in every year of the Parliament (otherwise we wouldn’t see any reduction till next year).

The Government already has a target of selling up to £5bn of public land and property by 2020 in order to help with deficit reduction. Given the other risks to the deficit (falling tax revenues from shares, slowing wage growth etc.), Mr Osborne may need to increase that figure.

Assets are incredibly powerful tools for social change, and selling them doesn’t generally make the public finances any better (unless the private sector can turn them into something more productive). Charities will be concerned that any more ‘fire sales’ will lead to the loss of assets (particularly local ones) without much time for communities to come together to bid for them. Moreover, the pressure to make maximum financial returns in order to pay down the deficit, will further disadvantaged local organisations.

We have called on the government to set aside just 3% of asset sales by central and local government to put into a Community Capital Fund which would help to provide a base for local community assets. This will make sure that communities are not hollowed out through the loss of shared assets. However, given the pressure to balance the books, will the Chancellor listen to longer-term arguments?

CFG – The place for all your #Budget2016 news

These are just some of the pressures on the Chancellor on what is going to be a very difficult Budget to navigate. Given its importance, CFG will be providing comprehensive coverage in the run up to the Budget and on the day.

Anjelica Finnegan, will be Live Blogging here from Tuesday, to give you the latest information on Budget plans and how this will impact charities.

Me, Caron and Heather will be tweeting throughout the day as measures are announced and analysed.

Finally, we’ll be producing our briefing on the day of the Budget, so that you can start to look at what the impacts will be for your organisation. Remember…

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