Budget 2016: balancing and backlash

Well. What a day that was, and what repercussions have already unfolded. I am referring to the Budget 2016, which was announced this Wednesday. I had written about the Budget that morning, and outlined expected policy proposals. But there were surprises aplenty, most noticeably on Friday evening. So I thought to write a report of sorts about the Budget, and the subsequent political aftermath.

The Budget contained fresh austerity measures, as predicted, with the Chancellor promoting ‘stability’ in public finances against the context of a poor economic showing. In addition, it contained plans to fight tax avoidance, reform the education system and help those on lower incomes save money. It also included measures aimed at assisting small businesses, measures designed to encourage saving, a clampdown on sugary drinks and measures to tackle tax avoidance. So, it was a mix of the old and the new, the expected and the unexpected. Interestingly, it was also a Budget containing controversial comments in relation to Europe, with the Chancellor George Osborne warning against Brexit.

It was a Budget which essentially undermined the Autumn Statement of last year, with the Chancellor being forced to concede that previously promising forecasts on growth, productivity, taxes and debt (as he had proudly mentioned in the Autumn Statement) were actually no longer accurate. The consequence? The UK is now some £55 billion worse off than what was planned for. Moreover, the worsening global economic outlook will leave the British economy £62 billion smaller in 2020. Thus, the general theme from Wednesday’s announcement is that far from reducing borrowing, the Government will have to borrow £35.6 billion more than previously expected in the next three years.

However, perhaps in an attempt of softening the blow, the Chancellor was at pain to emphasis the resilience of the UK economy, stating that his aim of producing a budget surplus in 2020 — which would be the first since 2001 — is still on target. The only downside is the surplus will come at the cost of £3.5 billion in new cuts in Government spending. And whilst Mr Osborne was long on promises of austerity, it was perhaps not surprising that he was actually short on the details of where cuts would be implemented. We were informed there would be cuts in the region of £2 billion in the NHS and elsewhere to fund pension costs, and there would be further cuts of £3.5 billion by 2020, nothing more. We had already been given this figure prior to the announcement, so evidently it was a case of releasing this early so that it did not come as a nasty surprise, and would not detract from the ‘sweeteners’ also contained in the Budget. Also note the attention afforded to pensioners -they do tend to be the most consistent voters, after all…

So, what did the Budget propose, and what implications do this proposals contain? Let’s have a run-through.

Firstly, let’s consider growth and public finances. The Office for Budget Responsibility (hereafter OBR) revised down its forecast for 2016 to 2% from 2.4%. It now predicts growth in 2017 of 2.2%, and 2.1% in each of the three years after that – lower than its previous expectations. Regarding public finances, the OBR has forecast borrowing of £21.4 billion for 2018 to 2019 – almost £16 billion off target. By 2019 to 2020, the public finances are supposedly set to swing to a a £10.4 billion surplus. (Key word there being ‘supposedly’.)

Next, we have measures relating to small business taxes. The plan involved more than doubling small business rate relief on a permanent basis, from £6,000 to £15,000, with the threshold raised permanently for the higher rate. It is estimated some 600,000 small businesses are to pay no business rates at all from April next year. Also of interest for all businesses: corporation tax will fall to 17% from April 2020.

Stopping multinational companies from avoiding tax payment in the U.K. was another of Mr Osborne’s priorities. He announced a measure to cut tax relief on interest payments and prevent companies from moving assets to tax havens, a move he claimed would raise as much as £9 billion. The Chancellor also said the Government would act to stop any unfair competition U.K. businesses face from Internet suppliers, who in some cases do not pay the valued-added tax (VAT). However, I cannot have been the only one who instantly thought of the controversial deal the Chancellor struck with Google, which he declared a victory only to have it dismissed and criticised by basically everyone else.

Savers were provided for, the the ISA limit to be increased to £20,000 a year for all savers. There will also be a new Lifetime ISA for the under-40s from April 2017. They will be able to put in up to £4,000 a year, with an annual bonus of up to £1,000 paid by the government until the age of 50. Savers who have already taken out a Help to Buy ISA will be able to move their money into a Lifetime ISA. (Note that I was angelically good, and did not subject you to an ‘ISA ISA baby’ joke.)

Regarding income tax: the rate at which workers start paying top rate tax is to be raised, from £42,385 to £45,000, with the tax-free personal allowance raised to £11,500 from April 2017. An estimated 1.3 million people will be exempt from paying income tax.

Speaking of tax, it was announced that regarding capital gains tax, the headline rate will drop from 28% to 20%, with the higher 28% rate continuing to apply to disposals of second homes and buy-to-let properties. For basic rate taxpayers the rate will fall from 18% to 10%.

The infamous ‘Northern Powerhouse’ featured, or rather the HS3 project was featured. HS3, aka the proposed fast-track rail link between Manchester and Leeds  received the Chancellor’s blessing.

Mr Osborne seemingly suggested that he is not just Chancellor of the Exchequer, but he is also apparently the Health Secretary and the Education Secretary, too. In terms of health, the Chancellor dropped a surprise when he announced that a new sugar tax will be levied on drinks producers by 2018, based on the volume of sugar contained within the product. The tax is being imposed on soft drinks firms in an effort to encourage them to make their products healthier. It is estimated this could raise some £520 million. As I mentioned in my initial Budget-related blog post, education reform was featured in accordance with the Chancellor’s theme of ‘putting the next generation first’. Every primary and secondary school in England to commence the process of becoming an academy by 2020. Schools will also be able to avail of the option to lengthen the school day for additional sport instruction. In addition, there was the floated suggestion that students may be compelled to study Maths until they are 18.

Excise duties were discussed. It was announced that Fuel duty will be frozen for a sixth year, with expected annual savings of £75 each for motorists. Scotch whiskey, beer and cider taxes were also capped, but not so for wine. And from Wednesday night, cigarettes rose by 2 per cent plus inflation.

And finally, the miscellaneous section.

Employers will pay National Insurance on pay-offs above £30,000 from April 2018. Flood defence spending will be increased by £700 million, funded by a 0.5 percentage point increase in the insurance premium tax. (The Government had to be seen to respond to the flooding which has ravaged parts of the UK in recent times.) There was support for the suffering North Sea energy industry, with the supplementary oil and gas charge halved to 10%, and petroleum revenue tax effectively scrapped. Lastly, the Stamp Duty Land Tax (SDLT) on commercial properties has been reformed to remove the ‘slab system’. Henceforth, different rates of SDLT will be payable on various portions of the commercial property transaction value.

In sum: Generation Y received a boost. For those struggling to know whether to save for retirement or a flat deposit, they will now have chance to do both with the new lifetime ISA. But trouble brewed in relation to the plans to cut the welfare claims of 640,000 disabled people to save £1.3 billion . For Mr Osborne did not appear to offer any assurance to those who will be affected by cuts to ESA, Universal Credit, PIP and the collapsing social care system. But more on this issue later.

With the EU referendum in sight, and the tense Cabinet division between those supporting David Cameron’s negotiation efforts and stance to stay in the EU, and those wanting to leave, Mr Osborne used the Budget announcement to wade into the debate. One of the key and most notable points Mr Osborne made during his speech was that the U.K. would be better off in a ‘reformed Union’. Moreover, he claimed, leaving the EU would lead to ‘disruptive uncertainty’, and went on to say:

“I believe we should not put at risk all the hard work that the British people have done to make our country strong again.”

He told MPs the economic forecasts drawn up by the independent OBR were based on the UK remaining in the EU, and they did not consider alternatives.

Unsurprisingly, this political promotion in the midst of financial policy was not warmly welcomed by the Conservative MPs who support Brexit. Moreover, Mr Osborne quoted the OBR as saying a vote to leave ‘could usher in an extended period of uncertainty regarding the precise terms of the UK’s future relationship with the EU’. However, the OBR soon stated that its forecasts were made on the basis of current government policy to stay within the EU, and it had not projected what would happen if the UK voted to leave. Perhaps understandably, groups campaigning to leave the EU accused the chancellor of trying to ‘politicise’ the OBR. So rather awkwardly, and through his own making, the Chancellor ended up in the position of trying to paint the OBR as both impartial and anti-Brexit, whilst OBR Chairman Robert Chote sought to clarify on Newsnight that the OBR does not have a stance on Brexit.

Speaking of the OBR: this was Mr Osborne’s eighth Budget, and once again he placed his faith in the OBR’s forecasts for government borrowing and growth. This dedication is interesting, because it must be said that these forecasts are starting to appear contradictory and scattered all over the place. Remember when during the first couple of years of the coalition were positive with smaller than expected borrowing figures recorded, the Chancellor went so far as to declare in his first budget the Government aimed to be making a surplus by 2015, with a year’s leeway just in case there was an unforeseen economic hiccup? Those were the days. For skip ahead to the 2012/13 financial year, and suddenly the forecasts became more erratic, complete with a reluctant admission that it would not be until 2019 that we would see that promised surplus. And now it has been pushed back until 2019-2020, once again on the basis of OBR forecasts. It’s a perilous gamble.

Once the dust had settled, as per tradition the Institute for Fiscal Studies (hereafter IFS) submitted its review of the Budget 2016. And, it was not exactly a rosy review. The IFS essentially declared the Chancellor is running out of time and is lacking flexibility regarding his surplus target. Despite ‘shuffling money between years’ and drawing up ‘wholly unspecified spending cuts’, the probability the the Chancellor will actually meet this promise to eliminate the deficit by 2019/2020 is only ‘just the right side of 50:50’, according to the IFS director when delivering the IFS Budget briefing. Not exactly full of confidence in the Chancellor, then, especially when reviewing his plans in relation to public spending and finances:

Mr Osborne had three fiscal rules – the welfare cap; the rule which said debt should fall as a fraction of national income every year; and the rule to get to budget surplus by 2019-20. He broke his welfare cap in November, and it is now broken by a bigger margin. He told us yesterday he is on course to break his debt rule by the end of this month. The surplus rule is the last rule standing.

The IFS’s Budget briefing doesn’t pack its punches. My personal favourite is within the discussion on excise duties in relation to alcohol:

 …In a bizarre aside Mr Osborne linked freezing spirits duty to the importance of whisky exports. Duties are not paid on exports. This is rhetorical nonsense.

Oh, and regarding the Chancellor’s plans on personal and savings taxes, we have this gem:

The disingenuousness of the rhetoric on the personal allowance continues. The chancellor boasted yesterday that the increase in it “means another 1.3 million of the lowest paid workers taken out of tax altogether”. No it does not mean that. Taken out of income tax, yes. But not taken out of direct taxes on income.

But the greatest, and loudest criticism was saved for the most controversial aspect of the Budget: the cuts to disability benefits. A growing number of Conservative MPs signalled their alarm over reductions in personal independence payments (PIP), which the Chancellor said would save £4.4bn over the course of this parliament. And by Friday, the Chancellor’s plans appeared to be unravelling as the Treasury seemingly sounded the retreat:

“This is going to be kicked into the long grass. We need to take time and get reforms right, and that will mean looking again at these proposals…We are not wedded to specific sums… it’s not an integral part of the budget.”

This came despite Downing Street having previously insisted the cuts would go ahead, and the Prime Minister mentioning the option of ‘softening’ the cuts through facilitating discussions with disability groups when asked in Brussels to comment on the storm brewing back home. The apparent Treasury climbdown was surely prompted by Conservative rebels deriding Mr Osborne over perceived toxic politics within the Budget, which juxtaposed the PIP cuts with tax giveaways for businesses and higher earners – sending a message that businesses are to be protected over vulnerable members of society. The IFS said the planned cuts would hit 370,000 people, with an average loss of £3,500 a year.

Perhaps aware of the grumbling against him, on Friday Mr Osborne stressed that the Government would “protect the most vulnerable”. It may be a case of too little, too late in terms of protecting his reputation and leadership ambitions, however. Mr Osborne has long been considered Mr Cameron’s successor but the growing questions over the budget will remind backbenchers of the debacle that was the 2012 Budget, when he was forced to reverse a series of planned stealth taxes on everything from pasties to caravans. Not to mention of course, that he was criticised for cutting the 50p top rate of tax, again seen to be only benefiting the highest earners. The Chancellor’s leadership hopes may have been quashed with the criticism that he used a range of accounting devices to disguise a looming £56bn ‘black hole’ in the Government’s finances. It does not sound too promising when your own MPs supposedly believe your leadership chances are ‘dead in the water’.

But why the sudden cattiness? Note that these MPs are said to be those close to one Iain Duncan Smith, who caused a furore with his shock resignation from the Department of Work and Pensions on Friday evening. He too packed no punches:

“I hope as the Government goes forward you can look again, however, at the balance of the cuts you have insisted upon and wonder if enough has been done to ensure ‘we are all in this together’.”

Mr Duncan Smith cited the cuts to the personal independence payment (PIP) as being the last straw, stating he cannot accept the additional cuts to disability benefit. In addition, the DWP and the Treasury appear to have been at loggerheads. The changes to the way PIP assessments work were announced a week prior to the Budget by the DWP. Now,  the Treasury stressed that the figures included in the budget were the DWP’s work, but DWP complained they were cajoled into publishing the proposals without the time to build support, and thus were under fire for the unpopular proposal. Moreover, Mr Duncan Smith had wanted any reforms to PIP to take place slowly, over the next few months – but the Treasury was opposed this, saying the savings had to be included in the Budget. Apparently the ‘final straw’ was when the Treasury sought to blame the DWP for the additional cuts when realisation dawned of the potential for a backbench rebellion. No sooner had news of Mr Duncan Smith’s resignation sunk in, than news broke that the planned cuts to disability benefits would be scrapped. The Government was evidently fighting to reclaim control of the situation, but it must learn the lesson of Cnut: you cannot hold back the tide.

What an eventful few days, with a very real impact of the political scene. For Mr Osborne, the clock is ticking. He must ensure his Budget bears fruit, otherwise he may find himself in a vulnerable position post-EU referendum, when a Cabinet reshuffle is likely to take place. It will be interesting to note how this develops further, and whether the Cabinet’s obvious divisions over Europe, emphasised again with Mr Duncan Smith’s resignation, reach breaking point.

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