Budget 2016 Overview

Introduction

It was famously said that ‘all roads lead to Rome.’ In British politics, all speeches currently lead to the EU Referendum. George Osborne’s Budget speech, delivered on Wednesday March 16th, was no exception.

More than ever, the Chancellor was seeking to balance politics and economics as he rose to speak. On the politics front, there were a good many restive backbenchers behind him who had already put paid (at least for now) to the Chancellor’s widely-trailed intentions to reform tax relief on pension contributions. There was also an electorate to convince – and the Chancellor’s own political ambitions. Make no mistake, if the ‘Leave’ camp wins the EU referendum, George Osborne’s chances of succeeding David Cameron in the inevitable leadership battle are almost non-existent.

So the political background to the speech was tricky: but not quite as tricky as the economic background.

The Chancellor has not only made his economic commitments public, he’s also passed them into legislation. The fiscal charter commits him to doing three things:

• Returning the Budget to surplus within four years and to spend less than his income. He has to do this unless the OBR allow him to suspend the fiscal charter, due to GDP either being less than (or forecast to be less than) 1% on a rolling four quarter on four quarter basis.
• He has also promised to see debt fall as a percentage of the economy in this financial year, and in every financial year through to 2020. This may mean selling some state assets – such as the shares in RBS and Lloyds – but this remains the Chancellor’s intention.
• Finally, he also promised to keep welfare spending within strict limits.

These commitments would have been fine if the world economy was powering ahead, but a shaky start to 2016 has seen the global economic picture clouded with doubt. The slowdown in China continues, the ECB has just announced yet more measures to stimulate the Eurozone, and at home, the British Chambers of Commerce (BCC) has just downgraded its UK growth forecast for the next two years, cutting the expected growth for this year from 2.5% to 2.2%.

The Chancellor’s commitment on welfare spending has already been breached, and on the morning of the Budget the Financial Times headline was, ‘Osborne to break second promise in Budget of fiscal claustrophobia.’

So, in the short term, the Chancellor faced a very difficult speech; in the longer term he faced an increasingly uncertain political future.

The Economy and the Numbers

Confident, as ever, the Chancellor bounced to his feet at 12:34pm and began reeling off the numbers, courtesy of the Office for Budget Responsibility (OBR).

‘Britain,’ he declared, was ‘set to grow faster than any other major economy in the world.’ (It may be news to the Chinese that the Chancellor still classes them as an ‘emerging economy.’) Nevertheless, the country faced a ‘dangerous cocktail of risks’ which naturally prompted a flood of self-congratulation from the Chancellor for all that attention he’d previously paid to the roof. Perhaps his most telling statistic in this passage was that when he’d come to office, Britain had been borrowing £1 in every £4 that it spent: next year it will be £1 in every £14.

But despite Britain having moved from being one of the worst prepared countries to face global uncertainty to one of the best, the OBR had still been forced to revise growth estimates downward in the face of the world economic slowdown. Growth for this year would be 2% (lower than many commentators had expected, and lower than the estimate from the BCC), before rising to 2.2% in 2017 and then steadying at 2.1% for the following three years.

These forecasts, the Chancellor was not slow to point out, were based on the UK remaining within the EU. Leaving, according to the OBR, ‘could usher in a prolonged period of uncertainty.’

Turning to the labour market, the Chancellor said that ‘since the Autumn Statement just four months ago, the businesses in our economy have created over 150,000 more jobs than the OBR expected.’ The unemployment figures published that morning had confirmed that UK unemployment had fallen to 1.68m for the period November to January, with the employment rate at 74.1% – the highest since records began in 1971.

The OBR forecast that inflation would be 0.7% this year, rising to 1.6% in 2017; the Chancellor confirmed that he would be writing to the Monetary Policy Committee to confirm that the target rate for inflation remained at 2%.

The Deficit and Debt Forecast

‘Britain is living within its means,’ declared the Chancellor, as he announced that government spending as a share of GDP would fall to 36.9% by 2020/21, having been 45% when he came to office.

His forecast for debt as a percentage of GDP was revised upwards – although he described this as an ‘anomaly.’ It would be 82.6% in 2016/17, and fall in subsequent years to 81.3%, 79.9%, 77.2% and then to 74.7%.

Despite the percentages going up, debt would be £9bn lower in 2015/16 ‘in cash terms’ and is forecast to be £14bn lower in 2016/17. The pot of gold at the end of the rainbow – a government surplus – is still forecast to arrive in the financial year 2019/20 with a surplus of £10.4bn, all thanks ‘to the decisive action we’ve taken today.’

Personal Taxation and Allowances

It took the Chancellor an hour of talking and a journey round the business tax system, the national infrastructure and the future of education before he answered the question everyone wanted answering: ‘how much tax will I pay?’ He announced the following specific measures:

Pensions and Savings

As we’ve reported in the introduction, the Chancellor didn’t – or wasn’t able – to introduce a wide-ranging reform of pensions taxation. However, he pulled one significant rabbit out of the hat with the ‘Lifetime ISA,’ declaring that young people would no longer need to make a choice between ‘saving to buy a home and saving for retirement.’

Business and Business Taxation

The Chancellor had plenty to say on business taxation as he sought to create a ‘level playing field’ between, on the one hand, British businesses and, on the other, both the multinationals he was keen to target and the increasing number of foreign companies selling through Amazon and eBay and avoiding UK VAT. The various measures, he said, ‘better reflects the reality of the global economy’ and raise £9bn in tax.

Other measures

The UK’s Infrastructure

As expected, the Chancellor announced a wide variety of infrastructure projects.

• The government committed itself to HS3, improving the rail link between Leeds and Manchester.
• The Chancellor also confirmed that Crossrail 2 would go ahead, linking north and south London.
• Insurance Premium Tax will rise by 0.5% to 10%, paying for an additional £700m for flood defences.
• There will be road improvements in the ‘Northern Powerhouse’ including a four lane M62 and upgrades to the M69 and A66.
• £20m will be spent on the country’s cathedrals. ‘After all,’ smiled the Chancellor, ‘the Conservative Party is a broad church.’
• There will be an introduction of museums and galleries tax relief from April 1st 2017 following a consultation over summer 2016.
• The delivery of 13,000 affordable homes two years early by bringing forward £250 million of capital spending to 2017-18 and 2018-19.

Excise Duties

There was little to report in the ‘beer, petrol and cigs’ department, but the Chancellor did give the usual updates during his address:

• The Chancellor froze fuel duty for the sixth year in a row.
• Tobacco duty will increase by 2% above inflation from 6pm on March 16th 2016.
• The duty on beer and cider is again frozen from 1st April 2016.
• The duty on Scotch whisky is frozen.
• All other duties will increase in line with inflation.

Education

As expected, the Chancellor announced that this parliament would see ‘schools set free.’ His aim is to improve education to ultimately boost the nation’s productivity, but with China opening roughly one new university a week, he has some catching up to do. Every primary and secondary school will become – or be on target to become – an academy by 2020, with particular emphasis being placed on falling standards in the North. ‘We are,’ he declared, ‘doing the right thing for the next generation.’ There is also an expected investment of up to £285 million a year to give 25% of secondary schools increased opportunity to extend their school day.

Devolution

There were also a number of announcements regarding devolution, with extra powers for Scotland, Wales and many English regions. And in what was widely seen as a boost for Zac Goldsmith’s chances of succeeding Boris Johnson as Mayor of London, the Chancellor announced the devolution of business rates to the Greater London Authority from April 2017, and a new commission to look at growth in the Thames Estuary.

Conclusions

After being on his feet for more than an hour, the Chancellor sat down to cheers from his backbenchers, a pat on the back from his next door neighbour and a few scowls from the Eurosceptics. In truth, this was a standard George Osborne performance; plenty of soundbites and a theme which ran through the whole speech. This time it was ‘putting the next generation first’ in a Budget which would see, ‘investors investing, savers saving and businesses doing business.’

To an extent, the Chancellor is right: Britain is doing better than virtually all the world’s other major economies. But the success of this Budget – and with it the Chancellor’s own political prospects – is at least as reliant on events over which he has no control as it is on the actions he took today.