Previewing the 2015 Budget almost exactly twelve months ago, we wrote:
What now for the Chancellor as he starts to prepare for the Budget on March 18th?
On the one hand, the UK is growing faster and recovering better than any other major economy. On the other, there are worrying clouds on the horizon. The victory of the left-wing, anti-austerity party, Syriza, in the Greek elections has created more confusion in European economies already threatened by deflation and about to embark on a massive quantitative easing programme. Some of the latest data coming out of the US is not encouraging…
And now to this year’s preview:
Harold Wilson may have taught us that ‘a week is a long time in politics’ but as George Osborne starts work on his 2016 Budget – which is due to be delivered on March 16th – very little has changed. The UK economy continues to out-perform many of our major competitors but the ‘worrying clouds on the horizon’ remain. The uncertainty over Greece has been replaced by the uncertainty over the UK’s referendum on leaving the European Union; there’s still quantitative easing in Europe, tension in the Middle East, mixed news from the US and – the biggest imponderable of all – the continuing slowdown in China.
The Chancellor – already with an emergency budget and the Autumn Statement under his belt since the May General Election victory – has consistently set out his intention to steer the public finances into the black by the end of this parliament. He will not be deviating from that course.
There are, however, a large number of unknowns along the way. Bank of England Governor, Mark Carney, has stated that there is no immediate prospect of interest rate rises, but base rates presumably will not stay at 0.5% until 2020. Inflation, wages and migration levels will all impact on the predictions of the Office of Budget Responsibility (OBR) but the biggest area of uncertainty in the UK is economic growth.
According to the CBI, the UK economy grew at its slowest rate since 2013 in the three months to January, with official figures putting UK growth at 0.5% in the last quarter of 2015. Rain Newton-Smith, the CBI’s director of economics, commented that, ‘the economy has had a tough start to the year.’ Reports suggest that the Bank of England will cut its forecast growth for 2016 from 2.5% to 2.3% – compared to the Chancellor’s recent forecast of 2.4%.
Fractions of a percentage point may not seem significant – but they are when you’re dealing in billions of pounds, and they could make all the difference for the Chancellor. A shilling may have been the difference between happiness and misery for Mr Micawber; a billion pounds or a tenth of a percentage point may have the same importance for the Chancellor…
Let’s turn now to the specific measures we might see in the Budget.
At time of writing most analysts were expecting changes to pensions tax relief: the Chancellor didn’t deal with this issue in the Autumn Statement, instead deferring it to the Budget pending ‘consultations.’ It was widely expected that he would move to a flat rate of pensions tax relief, removing the regime which sees basic rate taxpayers receive 20% tax relief but allowing higher rate tax payers to receive relief at 40% and 45%.
Most recent reports, however, now suggest that these plans have been scrapped. George Osborne drops plans to cut relief was the stark BBC headline , quoting a ‘Treasury spokesman’ as saying, “it was not the right time” to make changes to pensions tax relief. We will have to wait until 16th March 2016 before we know for sure what Mr Osborne is thinking.
The Chancellor has already relaxed the rules on accessing pensions cash. Contrary to the expectations of one Cabinet minister, we don’t seem to have a generation of pensioners suddenly driving Lamborghinis. Instead, research suggests that much of the money accessed from pension pots has been spent on home improvements. However, it’s home building that really interests the Chancellor, with reports suggesting that the UK now needs anywhere between 250,000 and 300,000 new homes a year. So don’t be surprised to see yet more measures to encourage housebuilding and/or relaxations of planning rules. Another extension of the Help to Buy scheme could also be on the cards.
The Budget will be accompanied by a review of business rates. These have long been seen as an extra tax on business, and there are now suggestions that the Government may introduce an upfront fee for lodging an appeal against a rating decision – a notoriously lengthy process. There have already been moves to give local authorities more control of business rates, but the Chancellor may go even further as the UK High Street continues to struggle against the online retailers.
There may well be further moves to help the manufacturing industry, against the well-documented background of the closure of the Port Talbot steelworks and a general slowdown in manufacturing. At the moment, nearly all the growth in the economy is coming from the service sector. Whether the Chancellor will dare couple this with his favourite ‘Northern Powerhouse’ phrase is open to doubt, given that the Department for Business, Innovation and Skills has just announced the closure of its office in Sheffield, the only one outside London.
The Budget can never be divorced from the politics of the Conservative party, especially with David Cameron’s stated intent not to fight another election. The Prime Minister has just returned from Brussels with a putative deal on concessions from the EU. This has won the backing of Home Secretary Theresa May, but left many of his backbenchers – and much of the media – decidedly sceptical. There’s no doubt that the Chancellor would like to move house – from 11 to 10 Downing Street, so cynical observers might expect to see some Budget measures designed to appeal to the right wing of the party.
…And we could also see some surprise announcements. According to the Independent, the Chancellor has been crowdsourcing ideas for the Budget. On January 22nd, HM Treasury tweeted: Are you a member of the public with an idea for Budget? 1 week until survey closes.
Apparently, a public suggestion to stop printing national insurance cards is already saving the Government £1m a year – although it’s doubtful that the Chancellor will go along with the most popular suggestion so far: ‘stop wasting money on HS2.’
You can also expect to hear more of the Chancellor’s favourite phrases in the Budget: no doubt he’ll yet again be ‘fixing the roof while the sun is shining’ but – as we said above – the main focus will be on the growth forecasts and the impact these will have on his determination to deliver a Budget surplus.
Rest assured though, whatever is in the speech on March 16th, we’ll be here to interpret it for you and to answer any questions you may have.