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Budget 2015: ‘There will be no giveaways and no gimmicks, this is a budget for the long term’

Budget 2015: ‘There will be no giveaways and no gimmicks, this is a budget for the long term’

🕔17.Mar 2015

That was the Chancellor’s message as he toured the television news studios the weekend before he was due to present the final budget of this coalition Government, reports Paul Dale.

In the immortal words of Mandy Rice-Davies, well he would say that wouldn’t he?

Naturally a grand political strategist such as George Osborne would not do anything quite as crude as slashing income tax rates, cancelling austerity and spraying financial largesse left right and centre in a desperate and unseemly dash for votes.

But if he did not use the set piece occasion of the annual budget statement to boost his own party’s chances in the May General Election (and possibly throw a few crumbs the Lib Dem’s way) he would be the first Chancellor in history to resist temptation.

The budget represents the final opportunity for this Government to make the political weather and somehow engineer the three or four point increase in opinion poll ratings that the Conservatives require to see David Cameron back in Downing Street on May 8.

Rather than a giveaway, Mr Osborne will be planning a ‘pull-away’ budget that enables the Tories to move seamlessly away from Labour towards the General Election finishing post. That, at least, is the idea.

Arguments about the deficit and debt will continue to rage, but stronger than expected economic growth and tax revenues has put about £6 billion in the Chancellor’s budget box for ‘giveaways’ of one type or another.

On the other side of the coin, Government borrowing just keeps rising despite the austerity cuts imposed on local and central government. In June 2010 the Office for Budget Responsibility believed public borrowing would total £37 billion this year. Instead, we will borrow £90 billion.

In January, the Treasury clocked up its biggest surplus in a single month for seven years: £8.8billion, putting it on course to achieve the Office for Budget Responsibility’s forecast of an £83billion deficit for the full financial year.

According to the Financial Times, not a newspaper normally noted for excessive optimism, the UK could have a £30 billion budget surplus by 2018-19, giving Mr Osborne the leeway to reduce spending cuts by £16 billion and approve tax cuts of £7.5 billion.

There will of course be a very obvious political dynamic to this budget.

Cutting or even abolishing inheritance tax could be Mr Osborne’s rabbit out of the hat this time, nicely shoring up the pensioner vote, although such a move would almost certainly be vetoed by Nick Clegg. But that may not stop the Chancellor pressing ahead with a Tory manifesto budget which could also involve taking millions of low earners out of national insurance contributions.

Two things seem certain: this budget won’t be as dull as the Chancellor has been suggesting; and a second emergency budget is highly likely after the General Election, whoever wins.

Already in the budget box

These changes were announced by Mr Osborne in last year’s budget but their implementation has been delayed.

The personal allowance, the amount people can earn before they start to pay income tax, will be raised to £10,600 in April.

The tax on savings, which stands at 10 per cent for income up to £2,880 will be cut to a 0 per cent rate for savings up to £5,000 from April. Only those whose non-savings income is less than £15,500 in 2015-16 will benefit from this change. The main group likely to benefit are pensioners.

Radical changes to pensions were also unveiled by Mr Osborne a year ago and are about to come into force.

From 6 April, those aged 55 and over will have the freedom to spend their defined contribution pension savings as they like, unless they have bought an annuity already – although the Chancellor is being widely tipped to allow pensioners to sell their annuities for a lump sum if they wish.

The amount people can pay into a pension and get tax relief on over their lifetime will be reduced from £1.25million to £1million, and the amount that can be paid in to a pension with tax relief each year will be cut from £40,000 to £30,000.

National Insurance contributions for those aged under 21 will be abolished in April. At present those earning between £7,956 and £41,865 pay 12 per cent of their earnings in NICs.

What’s on the cards for this budget?

Personal Allowance

Every coalition budget since 2010 has seen an increase in the amount that can be earned before paying the lowest rate of tax at 20 per cent, benefitting millions of low earners (and of course benefiting higher earners who also get the tax break).

We already know the starting rate is to rise to £10,600 in April from £10,000. That’s equivalent to a £120 a year pay rise, which is hardly going to amount to celebrations on the streets. There has been speculation that the allowance may be increased to £11,000 – a £200 pay rise for 11 million people.

The coalition government has a target to increase the personal allowance to £12,500 by 2020. Do not bet against a surprise rise to £11,500 in 2015-16. This would deliver a pay rise for 27 million people in April pay packets – a handy pre-election sweetener.

National Insurance

In an effort to counter the claim that increasing the tax personal allowance benefits higher earners as well as those on low incomes, Mr Osborne could raise the level of earnings at which National Insurance contributions have to be paid. NI contributions are paid on earnings above £153 a week, or £7,956 a year, at a rate of 12 per cent, but kicks in at a far lower level than the income tax threshold, which will increase to £10,600 in April.

Cutting National Insurance would ensure that 1.2million workers who earn too little to gain from the increase in the personal allowance – many of them women with part-time jobs – would benefit.

Minimum Wage

David Cameron and Nick Clegg have jointly announced this morning that the National Minimum Wage will increase by 3% to a new rate of £6.70 per hour, effective from October 2015.  The Government accepted the advice of the Low Pay Commission (LPC) on the headline rate, as well as a 17p rise for 18 to 20-year-olds to £5.30 an hour. But it increased the statutory minimum for apprentices by 57p per hour to £3.30, whereas the LPC recommended only a 7p rise. The CBI expressed concern about a potential “politicisation” of the LPC. George Osborne had previously said he wanted the minimum wage to reach £7 this year.

Pensions

Mr Osborne revealed over the weekend that he will allow pensioners to sell their annuity policies for a lump sum. This would benefit an estimated five million pensioners locked into poor-returning annuities. However, annuity sales are subject to taxation currently at 55 per cent. Mr Osborne is likely to reduce the tax payment to a person’s marginal rate.

Inheritance tax

Ideally in a pre-election budget a Tory chancellor would like to raise the threshold considerably, or even abolish entirely the so-called death tax. But Mr Osborne is unlikely to get approval for such a step from his Liberal Democrat coalition partners. The Lib Dems vetoed a move by Mr Osborne to raise the threshold to £1 million in 2010.

It is likely though that the current inheritance tax threshold of £325,000 will be increased, or the tax may be abolished for the main family home.

The Conservative Chancellor could well signal what his party would do in government next time if elected in its own right.

Business rates

This is an area where the Tories and Lib Dems seem to be as one. Details of a radical review of business rates, pushed by Treasury chief secretary Danny Alexander, will be announced which may result in replacing the property-based tax with a new charge. Mr Osborne will say that he wants to find a way of assisting small firms facing “crippling” business rates and help them to compete with online retailers like Amazon. The UK has the highest business rates in Europe according to the CBI.

Personal finance

One of the big announcements in last year’s budget was a decision to increase the amount an individual can save each year in a tax-free Isa from £11,520 to £15,000. In the Autumn Statement Mr Osborne added to this by allowing widows and widowers to inherit a spouses Isa. With an election around the corner we should expect the Chancellor to approve another inflation-plus increase in the maximum yearly Isa investment, probably to £16,000, and perhaps to exempt Isas from inheritance tax altogether.

New Towns

Mr Osborne is expected to announce approval of 20 housing zones on brownfield sites which have been cleared for development. These will provide 34,000 homes with a further 11,000 to be built in eight more zones to be developed in the future. It remains to be seen whether the coalition’s new towns prove to be any easier to deliver than the last Labour government’s eco towns, plans for which were unveiled in 2007. Ten were proposed, four sites got planning permission, but none have been built so far.

Home Compensation

The Government may dangle a carrot in front of families whose homes are threatened by infrastructure developments such as HS2 or airport runways by paying more than the going rate for the properties to free up land for major projects. The Chancellor is tipped to start a consultation process that could lead to payments worth 150 per cent of the market value of the homes.

Transport

Fuel duty – although frozen until May 2015, the Chancellor may take the opportunity to extend the fuel duty freeze, always a popular measure among motorists.

Air Passenger Duty (APD) – following the announcement that APD would be devolved to Scotland, and possibly extended to Wales, there are calls for the Government to go further. Under 12s no longer have to pay APD, but the scrapping of the duty entirely would be welcomed by many.

HS3 is very much Mr Osborne’s baby and the architect of the Northern Powerhouse is expected to use the budget to give the green light to High Speed 3, a high-speed rail link between Leeds and Manchester. The Department for Transport is to release a business case endorsing the construction of HS3, which will reduce journey times between Leeds and Manchester from 48 minutes to around half an hour.

Defence

In light of rising tensions between Russia and the West, there is increased pressure on the Government to meet the NATO target of spending two per cent of GDP on defence. However, senior Conservatives, such as Foreign Secretary Philip Hammond, have refused to rule out cutting defence spending after May 2015. This increases speculation that the Chancellor might be prepared to cut the defence budget to balance the books. However, David Cameron also faces growing external pressure from international allies to meet the NATO target and he may be clashing with George Osborne on this issue.

Home Affairs

If the Chancellor is going to spread around some tax cuts, he has to find the money from somewhere. It seems certain that the Government’s relentless attack on public sector spending will continue, with the Police now firmly in Mr Osborne’s sights. At the end of 2014, policing minister Mike Penning said there would be a cash reduction of £299 million in the 2015-16 police funding budget, compared with 2014-15.

Local Government

Any hope by town hall leaders that Mr Osborne will take his foot off the austerity pedal appears to be forlorn. Just before Christmas the Government indicated that local authorities would face an average 1.8 per cent cut in their spending power in 2015-16. Council leaders say the true figure is nearer eight per cent. Government grant for councils, their main source of revenue, has been cut by about 40 per cent since 2010 and further reductions are a certainty.

Communications

Danny Alexander, Chief Secretary to the Treasury, is pushing for a deadline on when the last five per cent of the country without superfast broadband can expect to get access to that network. Currently, the Government has set a target of getting 95 per cent of the UK access by 2017, which would mean 1.5 million homes missing out. It’s thought likely Mr Osborne will announce new subsidies to upgrade suburban areas where connection speeds have fallen behind.

Northern Powerhouse

It’s a safe bet that Mr Osborne will want to put more flesh on to the bones of his ambitious scheme to regenerate the economies of the great northern cities through investing in transport infrastructure. Details of a northern version of London’s Oyster card for use on trains, buses and trams will be announced and a cash injection to improve motorways and main roads as well as a £20 million Government handout for teaching and medical research facilities.

If you would like a more detailed version of our budget preview, please email kevin.johnson@rjfpa.com for a copy of the RJF Briefing Paper which can be sent to you this afternoon. 

@ChamberlainFile will be following the Budget from 12.30pm tomorrow. 

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