Building an economy that works for everyone: Autumn Statement 2016

Chancellor of the Exchequer Philip Hammond has presented the 2016 Autumn Statement to Parliament. In his speech, the Chancellor acknowledged that the UK’s economic outlook has become more uncertain as a result of higher-than-expected debt levels and the impact of the UK’s decision to leave the European Union. This blog looks at the key announcements of an Autumn Statement overshadowed by the uncertainties of Brexit and how they will affect the VCSE, business, and public sectors along with reactions from stakeholders.

Public Sector

The announcement of a new £23 billion National Productivity Investment Fund (NPIF) to tackle the nation’s productivity crisis will be of great interest to the public sector. The NPIF will prioritise ‘high-value investment’ over 2017-18 to 2021-22 and tackle the crucial areas of productivity, housing, research and development, and economic infrastructure. It will support a new Housing Infrastructure Fund worth £2.3 billion by 2020-21, which local government may apply for on a competitive basis. This will support projects such as roads and water connections to enable the creation of new private house building in the areas where need is greatest, delivering up to 100,000 new homes.

The Chancellor also announced that the Government will commit to investing 1 to 1.2% of GDP on infrastructure from 2020. As a result of this increased spending, money allocated to the devolved assemblies through the Barnet Formula will increase proportionately, with Northern Ireland set to receive an addition £250 million, Wales an extra £400 million, and Scotland an additional £800 million.

A significant portion of the Chancellor’s speech focused on strengthening the autonomy and spending powers of cities and regions within the UK. Some of the most notable announcements are as follows:

  • £1.8 billion will be allocated from the Local Growth Fund to English regions. This will consist of £556 million to Local Enterprise Partnerships (LEPs) in the North of England, £542 million to the Midlands and East of England, and £683 million to LEPs in the South West, South East and London.
  • Newly-established mayoral combined authorities will be able to borrow funds to invest in economically productive infrastructure that will help them perform their new functions. The Government will also consult on lending local authorities up to £1 billion at a new local infrastructure rate of gilts plus 60 basis points for three years to support infrastructure projects of high value for money.
  • The Chancellor reconfirmed the Government’s commitment to establishing City Deals across various regions, and announced that negotiations were commencing with Stirling, meaning that every city in Scotland will be on course to have a City Deal.
  • Funding was also confirmed for the evaluation study for the Midlands Rail Hub.

There was positive reaction from the public sector relating to the ambition of devolution, although this was tempered with calls for devolution deals to be struck with areas outside of the UK’s major cities. Mark Morrin, principal research consultant at ResPublica, said:

“Additional borrowing powers for Metro-mayors is welcome given their new responsibilities, but where similar devolved functions are performed by shire counties they should also receive the same borrowing powers.”

Other measures relating to the public sector included the following:

  • The Shale Wealth Fund will provide up to £1 billion of additional resources to local communities, over and above industry schemes and other sources of government funding. Local communities will benefit first and determine how the money is spent in their area.
  • The Universal Credit taper rate will be cut from 65% to 63% from April at a cost of £700 million.
  • The adult education budget for London will be devolved from 2019-20.

Reaction from the public sector was mixed, with local government bodies welcoming measures to build affordable houses, devolve further powers and boost regional infrastructure. However, there was concern about what was not included in the statement rather than what was in it, with the Statement’s focus on infrastructure, housing and taxation leaving little room for some of the other major issues facing the public sector.

Bronwen Maddox, Director of the Institute for Government, said:

“The Government still has a huge number of commitments to deliver on top of Brexit. Despite emergency funding for prisons, today we saw little indication of how the Chancellor will address the ticking time-bomb in other public services, like health and social care.”

Indeed, there was particular concern over the lack of mention of funding for social care, after the Association of Directors and Adult Social Services (ADASS) forecast that local councils will overspend almost £500 million on adult social care. Although some positives were taken from announcements such as the increase in the National Living Wage, the general feeling was that the Statement offered little to alleviate the nation’s health needs.

Business Sector

Key announcements relating to business and enterprise included the following:

  • £400 million will be invested in venture capital funds through the British Business Bank to unlock £1 billion of new investment in innovative firms planning to scale up.
  • The Rural Rate Relief will be raised from 50% to 100% next year, providing small businesses in rural areas with a tax cut of up to £2,900 per year.
  • Further measures to reduce tax avoidance include tackling inappropriate use of the VAT flat rate scheme; abolishing the tax advantages linked to Employee Shareholder Status; and introducing a new penalty for those who enable the use of a tax avoidance scheme that HMRC later challenges and defeats. These measures and others set out in the Statement are set to raise around £2 billion over the forecast period.
  • A commitment to the Oxford-Cambridge ‘growth corridor’, providing £110 million of funding for East West Rail and delivering the new Oxford to Cambridge Expressway.

The reaction from business was one of a general understanding of the constraints the Chancellor was operating within. Director-General of the British Chambers of Commerce, Adam Marshall, summed up the response by saying that the Chancellor had taken “a sober and responsible approach in view of the fiscal picture the UK faces”.

VCSE Sector

The Chancellor’s announcements offered little in the way of surprises for the VCSE sector. Mr Hammond’s decision to focus public spending on infrastructure projects and building economic resilience ahead of Brexit is unlikely to result in a significant funding boost for VCSE organisations from central government.

The Chancellor did however make a number of announcements affecting the sector, including over £102 million of LIBOR banking fines to support armed forces and emergency services charities. Over the next four years, more than 100 projects supporting armed forces personnel, their families and veterans; emergency service personnel; children’s hospitals, air ambulances and emergency responders; and museums and memorials will benefit.

The Chancellor also confirmed that Comic Relief has been appointed to deliver £3 million in funding from the £15 million “tampon tax” fund unveiled at last year’s Autumn Statement. Comic Relief is yet to confirm how the application process will operate, but a spokesperson said applications will be invited from 1 December 2016 funding to support women’s charities, including those running programmes that tackle violence against women and girls.

Social enterprises will be boosted by the announcement that the amount social enterprises less than seven years old can claim through social investment tax relief (SITR) will increase from more than £250,000 to a lifetime total of £1.5 million from 6 April 2017. SITR allows investors who put money into regulated social organisations, including charities, to claim back part of their investment against their tax bills.

Of more potential concern is the announced increase in Insurance Premium Tax (IPT) from 10% to 12%. IPT is a tax on insurers and it is up to them whether and how to pass on costs to customers. The Charity Tax Group has already warned that this could result in some charities facing increases of thousands of pounds in their insurance premiums.

The Autumn Statement has received a mixed reaction from the VCSE sector. Caron Bradshaw, Chief Executive of the Charity Finance Group, said:

“This Autumn Statement must mark the end of the mantra that ‘there is no money left’ and that charities should be happy with their lot.

“We have seen tens of billions promised in infrastructure spending, business rate cuts and personal tax cuts. Most of this has been financed by greater levels of borrowing. There isn’t a lack of money; there is simply a lack of political will to support the valuable work of our sector.

“There are some helpful policies in the form of the freeze in fuel duty as well as more Libor giveaways. But it is clear that we are not high enough up the new government’s agenda.”

The Chancellor’s most unexpected announcement was the abolition of the Autumn Statement itself. From 2018, a single annual Budget will take place every autumn, with an annual ‘Spring Statement’ to respond to the latest economic forecasts from the OBR. Mr Hammond explained this change as bringing the UK in line with other major economies which only make major tax changes once a year.

Nevertheless, the 2016 Autumn Statement ultimately provided little more in the way of certainty, with both the OBR and the Chancellor acknowledging that accurate financial forecasts will be extremely difficult or even impossible to produce until the full impact of Brexit becomes clearer. In the meantime, POLICYfinder will continue to provide an up-to-date account of the latest policy developments as they occur to ensure our clients are well-prepared to deal with whatever the future holds.

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By the POLICYfinder Team

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