As a result of the UK voting for Brexit, apart from the political turmoil, Sterling has dropped significantly against the US Dollar and the Japanese Yen, the new safe haven currency it seems. We also know that if there is to be a ‘post Brexit’ (so called) ’emergency budget’ it will not be until after the appointment of the new conservative leader and de-facto Prime Minister.
As to what any such Budget would look like then I can’t yet know. We have however had the pre and post vote prediction by the current chancellor of a tough budget with spending cuts and tax increases. The wisdom of such a budget has been questioned by more than a few. Earlier in the week of the referendum, before the polls opened, the Treasury published the government borrowing figures for May along with an updated estimate for 2015/16 borrowing. Such was the focus on Referendum debate, the numbers garnered little attention. However, as consideration turns to the Brexit world, the Treasury’s data is a useful starting point to answering the ‘What next?’ question:
- The revised borrowing number for 2015/16 was £74.9bn, £2.7bn higher than the March 2016 Budget projection, but £16.7bn below 2014/15 outcome. In the grand scheme of things, £2.7bn is a small difference, but one in the wrong direction.
- The projection for 2016/17 borrowing is £55.5bn, which it now turns out is £19.4bn below last year’s figure rather than £16.7bn less.
- After two months of 2016/17, borrowing has totalled £17.9bn, £0.2bn up on the same period last year. To be on track, the number should have been £13.1bn.
- The math’s means that to hit target, borrowing in the next ten months must be £19.6bn lower than 2015/16, i.e. about £2bn a month less, on average.
Thus even before the Referendum, the Treasury data suggested that Mr. Osborne was not going to hit his 2016/17 borrowing target, regardless of the outcome of the Referendum. He was facing a difficult Autumn Statement, in part due to cooling UK economic conditions brought about by government-induced Brexit uncertainty.
Now that the vote has come down in favour of Leave, there is a new large dose of uncertainty to deal with and this period of uncertainty has no clear end date. It is far from clear that George Osborne will remain chancellor after the outcome of the Conservative party leadership election. When he issued his dire Budget warning of 15 June it resulted in 57 Conservative MPs saying that they would vote against it to mean the threatened increased tax and reduced spending measures would only pass if Labour supported them – an unlikely scenario to put it mildly.
Add to that the fact that the short term recessionary economic outlook suggests any fiscal move should be towards stimulation rather than tightening and the chances of an ‘austerity Budget’ in the short term may be at least questioned.
The Treasury – whoever is at its head – will want to see how markets settle before deciding on next steps in making their next set of budget proposals. Interestingly, the Office for Budget Responsibility will be publishing its annual Fiscal Sustainability Report on 12 July. This will have to now reflect the Brexit consequences, a scenario ignored in earlier OBR (and Bank of England) projections.
Tax and Financial Planning
In relation to tax and financial planning, if the Budget is ‘austere’ then the current chancellor indicated that basic rate, higher rate and inheritance tax may need to rise, each by 2-3%. Some have suggested that an austerity based budget might also put the recent CGT rate reductions at risk. After all, no one really expected them (28%-20% and 18%-10%) when they were introduced.
Even if the tone of any Budget is simulative and these tax rises are avoided or diminished, action against aggressive tax avoidance will certainly continue though.
Post Referendum, the lesson of the past is that making any changes at times of extreme volatility is dangerous, if not foolhardy. Yes, the world had changed, but how is still far from clear at this stage.