Another complicated budget from Chancellor Osborne. Lots of tinkering with the tax and spending systems in Conservative ways that may distract from the gloomier economic numbers and the further austerity to come. That is not a criticism just an observation.
Let’s start with the macroeconomics. A slowing global economy, fragile financial markets and low productivity growth everywhere sees the Office of Budget Responsibility cutting its growth and inflation forecasts and, crucially, its assessment of future productivity potential. With employment still set to be the main engine of growth, UK real GDP is said to rise only 2% in 2016, down from 2.4% as forecast as recently as early December. The OBR could still be optimistic for this year, especially if BREXIT uncertainty increases and cuts investment and consumption even more than currently expected. Despairingly, only 2.1% growth is now seen as the underlying trend for this Parliament even if EU membership is retained. Inflation only returns to target (2% per annum) in 2018: a sorry tale, which monetary policy, with the threat of negative interest rates, is not helping. (Alarmingly, the FPC has been told to be particularly vigilant over the state of the banking system from now on.)
The economic forecasts mess up the government finances, keeping borrowing up in the near term and worsening debt ratios over the forecast period (debt/GDP 82.6% in 2016/17 and only down to 74.7% in 2020/21). The fiscal surplus target is delayed until 2019/20 – just in time for the next election when the Chancellor might be tilting for another job? Against this background, government spending is set to fall from 40% to 36.9% of the economy by 2020, as the government departments seek to find another £3.5bn a year by 2019/20.
The state is seeking to get more funds by finding £12bn from further measures to cut tax avoidance and evasion. Promise of a further cut in corporation tax to 17% and reductions to business rate thresholds, commercial stamp duties, and oil and gas taxes is offset by attacking loopholes, mainly exploited by large corporations. The Chancellor is selling a theme of large companies pay more and small companies pay less.
Other goodies are offered in the great devolution dance, for the national administrations and the English regions. From halving Severn tolls in 2018 to a combined authority for East Anglia, the Treasury offers a plethora of devolution measures that may yet turn out to be more mirage than substance, especially if you have not got an elected Mayor. The aim of 100% of local authority resources being raised and spent locally by 2020 is a transformation that could turn out to be highly stimulative and yet highly divisive. Yet another experiment in local development that may or may not be real before it becomes politically unacceptable. It is interesting that the Treasury is cutting business rates just when they are going to devolve them to local authorities!
This Budget claims growth is driven by infrastructure, education and enterprise.
- On infrastructure, the government will commission various road and rail schemes in the north (M62 widening/HS3 rail Man-Leeds/Man-Sheff tunnel), London (cross-rail 2 but nothing on a 3rd runway) and the South West (rail resilience). Meanwhile the insurance premium tax goes up another 0.5% specifically to pay for flood defences.
- On education, all schools are to be, at least, on the way to Academy status, independent of local authorities, by 2020. There are plans to boost performance in northern schools and to devise a new funding formula for all schools. On childhood obesity, the government is introducing a levy system on soft drinks in 2018 in order to promote more sport and other activities ‘out of’ normal school hours.
- On enterprise, class 2 national insurance contributions will be abolished in 2018, (helping the 3mn or so self-employed), most indirect taxes remain frozen, and capital gains taxes are cut from next month (base 18% to 10% and higher 28% to 20%).
Finally, with regard to personal taxes and savings, everyone’s finances are helped. For example, the personal income tax allowance will rise from £11,000 to £11,500 in April 2017 and the higher rate threshold will reach £45,000. The Chancellor also announced measures to help the under 40s to save, recognising the bewildering position that exists at present with pensions and other investment opportunities in a world of zero interest rates. The existing personal ISA limit increases from just over £15,000 to £20,000 in April 2017. A new “Lifetime ISA” will be created for the under 40s and until you are 50. As long as it is to be used for long-term savings (pensions or housing), savers can put £4,000 into this ISA and the government will add £1,000 per annum. Te help to buy ISAs (only just started) can be rolled into this new Lifetime ISA.
The budget is being headlined as one that puts the “next generation first”. Many parts of the Budget come later rather than sooner, however. There is a lot of detail to be worked out and many consultations to conduct before those details are finalised. Moreover, there are negative aspects in the detail yet to be analysed. Overall, the real worry is still in the macroeconomy. If realised, the wider risks could blow all these complicated fiscal measures and intentions out of the water.