In his first autumn statement, the chancellor has had to address lower than expected growth forecasts following the referendum, and he’s done so mainly by softening his fiscal targets (see our earlier blog post). As well as a shift in his predecessor’s approach to borrowing, Mr Hammond has set the tone for a more proactive role for government in developing the country’s infrastructure. The outlook for charities however, has not changed a great deal since last year.
Austerity isn’t over
While the chancellor is borrowing more, this doesn’t signal a general increase in departmental spending. At last year’s Spending Review, George Osborne set out £16bn in spending cuts for government departments. These spending limits are to be maintained, with one exception – Mr Hammond is incentivising departments to make efficiency savings by allowing them to keep up to £1bn (across all of government) of those savings for reinvestment in ‘priority areas’. So the vast majority of deep departmental cuts we saw last year are due to go ahead.
The extra borrowing announced today is to be very carefully targeted, mainly on investment and tax breaks for particular business sectors judged to be strategic spending priorities for the UK. Increased public spending on house building, transport infrastructure and high-speed internet isn’t likely to feed through into increased government income for charities or lower demand for their services.
Worth noting also is what we didn’t hear – in particular, no new funding for the NHS. Absent too was much mention of additional assistance for local authorities, which continue to face funding challenges (PDF, 360KB), beyond consultation on lending them up to £1bn to support infrastructure projects.
Only just helping
Much of the media attention has focused on the extent to which the chancellor would look to help those ‘just about managing’ (let’s please just call them middle-income households). While some measures targeted at these households were announced, the impact it will have on their incomes seems to be relatively limited.
The chancellor has announced a reduction in the taper rate for universal credit (ie how much benefits are withdrawn with every extra pound earned above a point). Instead of keeping 35p for every further pound they earn, universal credit claimants will now keep 37p (although these figures are lower once the claimant starts paying tax).
This change is expected to cost around £1.2bn by 2020, compared to the estimated £3.4bn that reversing the previous cuts would have cost, and is only likely to be worth £200-300 to full time workers. For most claimants, universal credit will remain less generous than the existing tax credit system in terms of the money households keep as they transition into and through work, and more than offset gains from the National Living Wage and personal tax allowance changes, below.
The chancellor also confirmed plans to raise the personal income tax allowance to £12,500 and raise the higher rate threshold to £50,000 by the end of the parliament. While it will no doubt be welcomed by many, the impact for lower income households is limited, as many are already not paying income tax. Only around a quarter of the benefit of the personal allowance rise is expected to reach the poorest half of households.
Source: Resolution Foundation
This is an interesting decision from the chancellor, as he has chosen to prioritise spending on measures that predominantly benefit those further up the income distribution, rather than targeted measures for lower income households. By way of comparison, the changes to the personal allowance and higher rate threshold are expected to cost £7-9bn depending on inflation, compared to the £1.2bn committed today to universal credit changes.
Keep an eye on the IFS’s analysis tomorrow, as they usually look at how welfare and tax changes are spread across people on different incomes – but in broad terms, charities should continue to expect households on benefits to see their income fall considerably over the coming years.
But what about charities themselves?
The chancellor hasn’t changed the distribution of Libor fines, confirming a further £102m for armed forces and emergency services charities over the next four years and £3m for women’s charities from the tampon tax. He’s also maintained the commitment of to keeping overseas development spending to 0.7% of GDP, although as growth is falling, this will be less in cash terms than previously forecast. Museums and galleries tax relief will be extended to permanent exhibitions, and a further £10m is being committed to heritage projects.
But other than this sector-specific funding, there are a number of policies that are likely to increase costs for charities, which they’ll need to plan for. The National Living Wage (or minimum wage for over-25s) is set to rise from £7.20 to £7.50 from next April. This is actually slightly lower than previously expected, due to sluggish average wage growth, but it will still represent an increased cost to all employers. National Insurance thresholds for employers and employees are also due to be ‘aligned’, at a cost to employers of about £7 per employee. Insurance premium tax is also due to rise from 10% to 12%, and salary sacrifice schemes (eg gym membership) are also losing tax relief (although pensions, childcare and cycle to work will keep it).
We’ll be looking closely at the detail of the autumn statement and OBR forecasts over the next few days and giving our verdict on what the broader direction of travel signalled by the chancellor means for the sector over the next few years – keep an eye on the blogs.