Lord Flight is Chairman of Flight & Partners Recovery Fund, and is a former Shadow Chief Secretary to the Treasury.
Philip Hammond is a good man; what you see is what you get; he is full of common sense, and has the invaluable experience of having led one business which succeeded and one which failed! He will do what he believes best in the national interest. I wish him success as Chancellor.
For the Autumn Statement, he had very limited scope. The main item was the £23 billion National Productivity Investment Fund, and the increase in infrastructure spending. Both an improvement in productivity and in our infrastructure are needed urgently. I was also pleased that he supported the planned reduction in Corporation Tax, which should help attract business to the UK.
The only additional point I make about productivity is that income tax credits have been a major cause of declining productivity over the last decade. They have served to reduce real pay, as Alistair Darling has acknowledged. The same thing happened 200 years ago under what was known as the Speenhamland system. Subsidising those in employment led to over-employment in agriculture, the main industry at the time, and a fall in productivity. If pay is subsidised, companies can afford to retain more staff than they really need. This was socially desirable during the 2008-2010 recession, but has since stopped productivity recovering. The higher minimum wage should stimulate an improvement in productivity, although it will also price many out of work.
I was disappointed not to see the punitive increases in Stamp Duty, and the fiscal attack on Buy to Let reversed in the Autumn Statement – perhaps next April? Stamp Duty, which can be as high as 15 per cent for second homes and Buy to Let purchases of over £1.5 million has killed the property market in Central London, and led to a sharp fall in Stamp Duty revenues, down £1.6 billion over the last year against forecast: a classic Laffer curve situation. It also amounts to a significant wealth tax, hitting in particular young London “professionals” who need to move to a larger house with the arrival of families. It also discourages the old to trade down. Does the Government want an illiquid residential property market in Central London or, possibly, a crash in London house prices?
The fiscal attack on Buy to Let affects some two million small landlords. It will reduce supply and increase rents. The truth is that Buy to Let has been the salvation for the provision of accommodation in the UK. The Royal Institition of Chartered Surveyors advise that a further 1.8 million new rental units will be needed by 2025. Reduced supply against increased demand will also provide the inevitable circumstances opportunity for rents to increase.
When Ireland introduced similar measures in between 1998 and 2001, rents went up by 50 per cent. Our own measures are, in practical terms, also retrospective on existing Buy to Let investments, which was not the case in Ireland. The abolition of allowing interest expense as a cost against rental income, replaced by a 20 per cent credit against taxable profits (calculated without interest as an expense) will push many into a higher tax bracket, and for some will virtually wipe out profits. Buy to Let has not been under-taxed compared with owner occupiers, and is only a competing buyer for particular properties in a minority of cases.
I also have concerns at the increase in the Insurance Premium Tax. There are important objections to it, and it breaks the golden rule that businesses should not be charged VAT on inputs. It will cause economic distortions and hit industries requiring substantial insurance – for example, chemicals, pharmaceuticals and construction – and may lead to under-insurance.
The big issue is, however, the size of and the increase in government debt. Borrowing will be £122 billon higher than forecast in March over the next fove years, at a total of £216 billion. In 2017/18, debt is forecast to reach 90 per cent of GDP, approaching £2 trillion and £30,000 per person. We are not paying for a war, nor in a position of needing Keynesian stimulation. This year growth is better than forecast; the next two years it may be a bit below forecast, and the year after that, no change is forecast.
The underlying issue is that welfare, health and education spending are out of control, and now amount to some £500 billion a year – 65 per cent of all public spending. When the Conservatives lost power in 1997, the NHS budget was £18bn: it is now approaching £160 billion. These levels of spending and of increases in spending are not sustainable.
The main good news for the UK economy is the continuing increase in entrepreneurship and the huge increase in new SMEs. We have again become a very innovative economy leading the world in tigital and tech. This promises good news for the future.