Budget 2018: three things we learned

30 October 2018

Yesterday the Chancellor Philip Hammond set out the government's latest BudgetThis isn't intended to be an exhaustive assessment of it (many of the organisations we link to have done much more in-depth analyses), but we've picked out three things that you might want to know more about. We look at what the budget means for austerity, income tax payers, and major digital companies.

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Austerity may be ending for the NHS, but not for all government departments

The Chancellor announced in his statement that “the era of austerity is finally coming to an end”. “Austerity” is the term broadly used to describe the policy of reducing spending on public services, as committed to by the coalition and Conservative governments since 2010.

This budget will see some notable spending increases for the NHS over the next five years, with spending on public services broadly flat elsewhere. In the words of the Institute for Fiscal Studies (IFS), spending for many government departments “ticks up next year before falling a bit”. As the Resolution Foundation puts it, this might be better defined as an “easing” rather than “ending” of austerity.

We already knew that the NHS is getting a real terms spending increase over the next five years. By 2023/24, spending on the NHS will be £20.5 billion higher in real terms than it is today. Spending on defence and overseas aid will also be up in real terms.

Outside of health, public spending will be broadly flat over the next five years. There is £3.2 billion of additional funding for public services outside health, meaning “that it no longer falls in real terms” up to 2022/23, according to the independent Office for Budget Responsibility.

As a result of all this, health is increasingly dominating public spending overall. It “will have risen from 23% of public service spending in 2000 to 29% in 2010, and is set to reach 38% by 2023/24”, according to the IFS.

Despite the broad lack of spending reductions, the Institute for Government adds an additional note of caution, arguing that this spending “is not enough to ensure that [it] will keep pace with population growth”.

Spending not keeping up with population growth will mean additional pressure on these government departments, whose “per capita real-terms budgets are set to be 3 per cent lower in 2023/24 than 2019/20” according to the Resolution Foundation—in other words, they’ll have less money per person.

Income tax changes will mainly help higher earners

The Chancellor also announced that next April, the personal tax allowance will increase from £11,850 to £12,500. That’s the amount of earnings on which you don’t have to pay income tax. Anyone earning over that £12,500 will therefore see an additional £130 in take-home pay from the new, higher threshold.

The threshold for the higher rate of income tax has also been increased. Currently, you start paying the higher rate (of 40% tax) once you earn over £46,350 a year—but this will rise to £50,000 from April 2019.

For someone earning over £50,000, that means a total reduction in taxes of £860: combining a £730 saving from the higher threshold, and the £130 saving from the lower one. However, changes to national insurance thresholds mean the overall saving will be lower than this—one report suggests the total will be £520 a year.

And who will these savings help? For a start, they won’t help anyone earning under £11,850 a year—most likely to be part-time workers.

The £130 saving from the lower threshold will be passed on to the majority of taxpayers (83% of taxpayers currently pay the basic rate of income tax). The additional saving from the higher threshold, however, will only reach relatively high earners. Back in 2015/16 (the latest year we have data for) under 13% of taxpayers were earning enough to benefit from the change, with under 11% of taxpayers earning over £50,000 a year.

The Resolution Foundation puts it in starker terms. “84 per cent of the income tax cuts announced yesterday will go to the top half of the income distribution next year, rising to 89 per cent by the end of the parliament (2022/23) when almost half (45 per cent) will go to the top ten per cent of households alone. The richest tenth of households are set to gain 14 times as much in cash terms next year from the income tax and benefits giveaways in the Budget as the poorest tenth of households (£410 vs £30).”

A new digital tax—it might be the symbolism that matters most

One of the more novel policies announced at this year’s budget was a new “digital services tax”. But what does it mean? Frankly, we hope that we can do a better job explaining it than this government graphic did.

A 2% digital services tax will be applied to the revenues of major search engines, social media platforms, and online marketplaces from April 2020. The reason for this is that part of these companies’ revenues comes from the fact that UK users participate in their services.

One way to think about this is that social media platforms and search engines earn money from targeting adverts towards users on their pages. Other businesses will pay social media platforms and search engines that have lots of users, because they are able to effectively reach the audiences that they want to target adverts at. This means that the people who use social media and search engines are effectively raising revenue for them, by being a large, lucrative audience which advertisers are willing to pay to reach. The tax is therefore on the fact that UK users are helping these online companies generate revenue.

This isn’t the only example of where the tax applies, but it’s broadly illustrative of the underlying idea. It is not a tax on the online sales of goods, or a generalised tax on online advertising or data collection.

You can probably imagine who this tax is most likely to affect—the likes of Facebook, Google, and Amazon. Businesses will need to generate revenues of at least £500 million globally from such business models to be subject to the tax. Companies with low or negative profits would not need to pay the tax.

The government estimates that this will raise £1.5 billion over four years, or £0.4 billion a year on average. The IFS has pointed out that that’s pretty small as tax revenues go—for instance, corporation tax raises over £50 billion a year. Faisal Islam of Sky News points out that it’s the equivalent of increasing the basic rate of income tax by a tenth of a penny.

But it should be noted that this policy has come about as the EU is struggling to get through a similar policy of its own, which aims to address that today’s international corporate tax rules “do not capture business models that can make profit from digital services in a country without being physically present”. The government says that it will “continue seeking a global solution to ultimately replace the [digital services tax]”.

It may be that this policy has more power in the symbolic fact that the government is thinking of new ways to tax modern digital services, and as part of an effort to get international cooperation on the issue, rather than in the tax revenue it is going to generate for the exchequer.

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