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Budget 2016

Wed 16th March, 2016

Chancellor of Exchequer, George Osborne’s 8th Budget

Below is a summary and brief analysis of announcements in today’s Budget.

Introductory remarks

The UK economy is projected to grow faster than any other advanced economy in the world, with the deficit down by two-thirds and falling each year.

The Chancellor identified the “dangerous cocktail” of risks facing the economy: financial market turbulence, low productivity across the West and a negative global economic outlook.

However, international forecasts expect Britain to grow faster than any other major advanced economy. The Chancellor stressed, to Tory-backbench outrage, that the forecasts are predicated on the UK remaining in the EU and warned of the potential volatility in financial markets if the UK were to leave.

He stated from the beginning that in this Budget, the next generation would be put first.

John McDonnell, Shadow Chancellor, has said the Budget is based on “failure” as the Chancellor has broken his fiscal promises, failed to improve wages and failed to balance the books.

Headlines

  • Personal allowance will rise to £11,000 in two weeks’ time
  • Business rates reform
  • Corporation tax cut to 17%
  • Maths taught until age 18, with all schools to become academies by 2020
  • Introduction of a ‘sugar tax’ on fizzy drinks
  • Transport investment across country
  • Greater devolution
  • New savings ISA for young people

OBR Remarks

The Office of Budget Responsibility, set up to independently assess government spending plans, has said that every year of its forecast shows growth.

However, the OBR revised down output and world trade, in part due to lower growth in emerging economies like China and weak growth in the developing world. Monetary policy has not normalised this year, as expected, but instead further loosened. The European Central Bank, Sweden and Japan (among several others) have introduced unprecedented negative interest rates.

The State of the Books

Next year the Government will borrow £1 for every £14 spent, down from £1 in every £4 in 2010.

In 2014, the UK was the fastest growing advanced economy in the world, ahead of all but the USA.

The OBR’s downgraded predictions for productivity rates are below. The brackets show changes in estimate since November 2015:

2.2% in 2015

2% (-0.4%) in 2016

2.2% (-0.3%) in 2017

2.1% (-0.3%) in 2018

2.1% (-0.2%) in 2019

2.1% (-0.2%) in 2020

 

Employment

Since last year’s Autumn Statement over 150,000 more jobs were created than the OBR expected. This announcement came on the same day it was announced that employment is at its highest level ever. The Chancellor happily informed the House of Commons that we have today the lowest proportion claiming out of work benefits since November 1974.

Almost 90% of these new jobs are in skilled occupations, and three-quarters are full-time.

He added that the OBR forecasts a million more jobs over this Parliament (ending in 2020).

Inflation forecasts have fallen to 0.7% this year and 0.6% next.

Cuts and Government Spending

Government spending is set to fall to 36.9% of GDP by 2020. As reported this week, an additional £3.5bn/year in savings are to be found by 2020.

International aid will remain at 0.7% of Gross National Income.

Public sector pensions will continue to be reformed. So far, changes already introduced are expected to save £400bn over the long term. To ensure pensions remain sustainable, public sector employer contributions will rise. The Chancellor said this would be affordable through lower inflation, which had meant a ‘fiscal windfall’.

Debt and Deficit

George Osborne has broken one of his fiscal promises: debt is above target, though he attempted to mitigate this by saying that debt in cash terms is £9bn lower than forecast.

The forecasts for the next few years (as a measure of GDP) are:

82.6% in 2016-17

81.3% in 2017-18

79.9% in 2018-19

77.2% in 2019-20

74.7% in 2020-21

When George Osborne became Chancellor, the deficit was forecast to reach 11.1% of national income – the highest level in the peacetime history of Britain.

The deficit is forecast to fall next year to just over a quarter of that.

2.9% in 2016-17

1.9% in 2017-18

1.0% in 2018-19

In cash terms, in 2010, Britain was borrowing £150 billion a year. This year the government expects to borrow less than half that, at £72.2bn.

Borrowing continues to fall – but not by as much as before – before the budget reaches a surplus in 2019-20:

£55.5bn in 2016-17

£38.8bn in 2017-18

£21.4bn in 2018-19

+£10.4bn in 2019-20

 

5 Key Themes

The Chancellor identified 5 key themes that would underpin his Budget.

1. Tax Reform

Intending to ‘level the playing field’ which is currently considered tilted against small business, the Chancellor outlined the below tax changes:

  1. Some Multi-national corporations (MNCs) deliberately over-borrow in the UK to spend abroad and then deduct the interest bills against UK profits. From next year interest deductibility for the largest companies will be restricted to 30% of UK earnings
  2. Firms’ losses will be treated differently, with the maximum amount of profits which can offset using past losses to 50%. However, the historic losses in banking sector will be limited to 25%. This is expected to raise £9bn for the Treasury
  3. Corporation tax will be reduced from 20% in 2015 to 17% in 2017
  4. Two new tax-free allowances worth £1000 a year for trading and property income are being introduced. Billed as a tax-break for the digital age, around half a million will benefit
  5. Tax cut to business rates: currently small business rates relief is only permanently available to firms with a rateable value of less than £6,000. Previously, this could only be doubled for one year. The new threshold for small business rate relief will be £15,000 (and the higher rate increased to £51,000). From April 2017, 600,000 businesses will pay no rates at all and 250,000 are expected to see their rates cut
  6. Business rates uprating will switch from RPI to the lower CPI measure of inflation. Lower commercial stamp duty rates have been reformed: From now on, commercial stamp duty will have a zero rate band on purchases up to £150,000; a 2% rate on the next £100,000; and a 5% top rate above £250,000. There will also be a new 2% rate for those high value leases with a net present value above £5 million. This new tax regime comes into effect from midnight tonight. These reforms are expected to raise £500m a year. And while 9% will pay more, over 90% will see their tax bills cut or stay the same. The Chancellor gave the example that if you buy a pub in the Midlands worth £270,000, you would today pay over £8,000 in stamp duty. From tomorrow you will pay just £3,000

2. Devolution

The Chancellor believes local communities should reap the rewards of local growth and said that local government funding will be 100% funded from local government, rather than through the ring-fenced grants from central government.

  1. In Wales new powers will be devolved and, from 2018, the Severn tolls will be halved
  2. In Northern Ireland corporation tax will be devolved
  3. There is further Mayoral devolution to cities across country, though many have questioned whether there is an appetite for this
  4. Powers over the criminal justice system in the Greater Manchester area will now rest with the Mayor of Manchester
  5. The Greater London Authority will retain all business rates from April 2017
    1. Innovation proposals are to be brought forward by the Business Secretary, Sajid Javid, to lead the way on 5G technology
    2. £20m will be made available to help young families in SW England on to housing ladder
    3. £115m to support those who are homeless and sleeping rough
    4. HS3, between Manchester and Leeds, has been given the green light
    5. National Infrastructure Commission was set up to advise on decisions needed to boost productivity and has recommended stronger links across North England, a 4 lane M62, money to research a tunnel road from Sheffield to Manchester. A66 and A69 roads will be upgraded
    6. London Transport: CrossRail 2 will be commissioned by the government
    7. Flood defences: not affordable in current budget, therefore .5% increase in insurance premium tax

3. Infrastructure 

  1. Innovation proposals are to be brought forward by the Business Secretary, Sajid Javid, to lead the way on 5G technology
  2. £20m will be made available to help young families in SW England on to housing ladder
  3. £115m to support those who are homeless and sleeping rough
  4. HS3, between Manchester and Leeds, has been given the green light
  5. National Infrastructure Commission was set up to advise on decisions needed to boost productivity and has recommended stronger links across North England, a 4 lane M62, money to research a tunnel road from Sheffield to Manchester. A66 and A69 roads will be upgraded
  6. London Transport: CrossRail 2 will be commissioned by the government
  7. Flood defences: not affordable in current budget, therefore .5% increase in insurance premium tax

4. Education

The Chancellor announced that all state schools will become academies by 2020, removing them from Local Authority bureaucracy, and that a there will be a new focus on improving school standards in the North after seeing success in London.

 

Other measures announced include:

 

  1. Teaching maths to age 18 for all pupils
  2. A White Paper of improvements in education is to be presented by the Education Secretary, Nicky Morgan, tomorrow
  3. Long term plans for children’s healthcare
    1. 5-year-old children consume body weight in sugar every year, leading to the introduction of a sugar levy on soft drinks. Coming into force in 2017, it will be based on the volume of sugar and in two bands: those with 5g per 100ml and those with more than 8g per 100ml, (pure fruit juices and small businesses will be excluded). It is expected to raise £520m. That money will be used to double the funding for primary school sports. Liberal Democrats have welcomed the policy but accused the Chancellor of not being honest as the amount of money schools receive per pupil has been reduced. This money is therefore expected to replace that, rather than be in addition.
    2. Secondary schools will be funded for longer school days, and will have to apply. Currently there are enough resources for a quarter of schools to start immediately.
    3. LIBOR funds will also help with children’s hospital services

5. Taxes/Savings

The Chancellor has promised better action on tax evasion, tax avoidance and imbalances in the system which will raise £12bn over the rest of this Parliament. Public sector organisations will now have a new duty on them to ensure that their workers pay the correct tax.

 

He also pointed to figures showing that the richest 1% paid 28% of all income tax revenue, which he claimed was a higher proportion than in any single year of the last Labour government. 

  1. The tax free personal allowance will rise to £11,000 in two weeks’ time and reach £11,500 by next April. This will provide 31 million people with a tax cut and take 1.3m of the lowest paid out of tax
  2. The higher rate threshold will be raised to £45,000 next year.
  3. The £12m raised through the ‘Tampon Tax’ will go to women’s charities
  4. Excise duties: fuel duty will remain frozen for 6th year in a row
  5. Tobacco duty: will continue to rise 2% above inflation from tonight
  6. Beer and cider duty: to remain frozen
  7. Scotch whiskey: freeze on whiskey and other spirits duty
  8. Other alcohol: will rise in line with inflation as planned
  9. Capital gains tax: 28% rate has been cut to 20%. For basic rate payers this is cut from 18% to 10%
  10. Class 2 national insurance contributions have been scrapped for self-employed workers
  11. For young people, ISA reforms have seen the limit rise to £20,000 from April 2017
  12. A lifetime ISA has been created. People aged under 40 will be able to deposit up to £4,000/year topped up with a government bonus (£1 for every £4 saved). This is intended to be used to save for buying a house or for retirement. This money can be saved every year until aged 50.

 

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