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Budget16: No end in sight to the Age of Austerity

Budget16: No end in sight to the Age of Austerity

🕔14.Mar 2016

The motto for George Osborne’s Budgets so far might be to expect the unexpected.

The Chancellor seems to delight in producing the most unexpected of rabbits out of his hat, for example the announcement three years ago that anyone over 55 could cash in their entire pension pot if they wished to do so, or the pre-General Election creation of the Living Wage that put Labour on the back foot.

This time, though, Mr Osborne would appear to be boxed in by circumstances beyond his control.

The June referendum on Britain’s future in the EU means that the Conservative government will be most unwilling to rock the boat. Mr Osborne, a key supporter of the Stronger In movement, will wish to deliver a cautious rather than a controversial or unpopular Budget.

Unfortunately for the Chancellor, the rosy financial scenario he unrolled when delivering the 2015 Autumn Statement is beginning to look decidedly shaky.

The size of the economy last year was one per cent, or £18 billion, smaller than the Office for Budget Responsibility predicted three months ago. Lower than expected earnings and inflation are the main cause of the gap, leaving Mr Osborne with a shortage of tax receipts to replenish the Government coffers.

He may be regretting hinting that the years of austerity are coming to an end, and it has been confirmed that this Budget will contain yet more public spending cuts as the Chancellor struggles to balance the books.

The size of the £18 billion ‘black hole’ has already led Mr Osborne to warn of having to “undertake further reductions in spending” in light of the “dangerous cocktail” of risks to Britain’s prospects.

Cue further cuts to Whitehall departmental spending which has already been reduced to levels seen only once since the Second World War, between 1997 and 2001.

The Chancellor toured the television news studios over the weekend to lay the groundwork for an additional £4 billion of savings by the end of the current parliament. Mr Osborne said the cuts amounted to an additional 50p for every £100 of public spending, or 0.5 per cent – which he described as not “a huge amount in the scheme of things”.

However, when ring-fenced departments such as health and education are taken into account, the 0.5 per cent soon becomes two or even three per cent for unprotected departments, including local government.

Birmingham city council will not be alone in wishing to examine the small print of this Budget very closely. At Christmas, Mr Osborne told Birmingham and other councils they could expect improved grant awards from 2016-17 under a Fairer Funding scheme. Will some of that additional cash now be clawed back?

The Chancellor has promised to eliminate the deficit by 2019-20, in time for the next General Election. Politically, it is unthinkable for the Conservatives, and for his own prospects in the race to replace David Cameron, that he should fail.

Many of the usual methods used by governments to raise income have been rejected by Mr Osborne. He has ruled out any increase in VAT, income tax or national insurance, has set corporation tax on a downward path and has promised to increase personal allowances, giving tax breaks to every earner.

A rebellion in the House of Lords resulted in the Chancellor stepping back from a £4 billion reduction in working tax credits. He must find that money from elsewhere.

One issue that has been generating headlines is policy on pension tax relief. After a lengthy and wide-ranging consultation, the Government has ruled out any changes – in this Budget at least – amid reports of a Conservative backlash.

By discounting that reform, Mr Osborne has restricted his options for raising the tax base.

The stakes are high for the Chancellor. He has gambled a huge amount of political capital on achieving a public finance surplus by the end of the decade – a surplus that is very vulnerable to changing forecasts.

In the Autumn Statement, based on optimistic projections from the Office for Budget Responsibility of higher tax receipts from VAT, income tax and corporation tax and lower debt interest payments, Mr Osborne spent what he believed would be a windfall on scrapping cuts to tax credits and protecting police funding.

That left him with a projected surplus of £10.1 billion by 2019-20. But that surplus is in danger of disappearing, according to the latest forecasts.

The Institute for Fiscal Studies said if the Bank of England’s downgraded earnings growth projections were mirrored by the OBR, £5 billion would be wiped off the 2020 surplus. One key number to look out for is £73.5 billion, projected borrowing for 2015-16.

These forecasts are based on the assumption that Mr Osborne will break the habit of a chancellorship and impose the first increase in fuel duty since 2010. With prices at the petrol pump low due to the fall in the oil price, many believe it is as good a chance as he will get to increase the tax – but it is a move that will trigger a backlash from ‘blue-collar’ Tories.

Look out for accelerated tax cuts through rises in the personal allowance, the potential sale of more assets like Lloyds shares and possibly Channel 4, and trumpeting of the ‘Northern Powerhouse’ and ‘Midlands Engine’. As ever, the policies, projections and Mr Osborne’s own performance will play into analyses of a future Conservative leadership contest.

Business and Finance

Reduced business regulation

The CBI has called for a reduction in the financial and regulatory burden on business, starting by linking business rates to the consumer price index rather than the retail price index and taking small businesses out of tax altogether.

Business Secretary Sajid Javid announced a new Government plan to reduce £10 billion worth of regulation at the British Chambers of Commerce conference and further details could be announced in the Budget.

There is potential for an announcement on the sale of Lloyds shares with the sale due for the spring. This had been postponed until the markets became less volatile, but the Chancellor will be keen for an injection of cash into the Treasury.

Business taxes

The Chancellor has been carrying out a review of the business rates system and will announce the result in the Budget. Ministers have drawn up proposals to exempt industrial equipment from business rates but apply only to new investments, stopping far short of industry demands for an exemption for thousands of existing factories.

Local government

Mr Osborne has promised a localisation of business rates, allowing councils to keep 100 per cent of all that they raise through economic growth against 50 per cent at the moment. Mr Osborne will announce more details on this in the Budget. Councils will be keen to learn about measures to protect poorer local authorities and any proposals the Government may have to cushion councils against the impact of appeals against rates bills by businesses.

Work and Pensions

It has been reported that the chancellor is considering taxing the contributions a company makes to an employee’s pension. The tax could be worth £5 billion.

Pension taxation to remain unchanged

After speculation that the chancellor will scrap the current system which enables savers to claim tax relief at the rate they pay income tax on their pension contributions — whether that be 45, 40 or 20 per cent and introduce a flat rate of 25 per cent, plans now appear to have been scrapped following threats of a revolt by Conservative MPs.

General Taxation

Income tax

Reports suggest the Chancellor wants to accelerate progress towards the target of raising threshold for the 40 per cent higher income tax to £50,000 by 2020. We could see the Budget confirm increases to the income tax threshold.

Fuel duties

Given the plunge in oil prices, an increase in fuel duties to off-set the impact on the Government’s balance sheets is possible. Reports suggest that this could result in an additional two pence per litre on petrol being added to help fill a £3 billion hole in the country’s finances. By linking fuel duty to inflation, the Government could still argue they had frozen it in real terms.

Stamp duty

In December, the Government published a consultation on higher rates of Stamp Duty Land Tax (SDLT) on purchases of additional residential properties. Mr Osborne is set to confirm the final policy design at the Budget.

Married couples’ tax

There have been calls for a further extension of the married couples’ tax allowance as recent data has suggested recently that uptake of the new tax break was a fraction of what was originally expected. As it stands, critics of the tax break are claiming that the low participation rate shows that the measure is of no benefit to many families, while also being too meagre and paying out a maximum of approximately £4 a week—something Mr Osborne could remedy in his statement.

The Arts

The Chancellor could potentially sell off Channel 4 to help balance the books in a time of slower growth and overshot forecasts – the deal could generate as much as £1 billion for the Treasury. Culture Secretary John Whittingdale has said he is “looking at different options” to ensure the channel’s viability given the “very fast-changing and challenging environment” in the media industry.

Digital Strategy

In December 2015 Culture and Digital Economy Minister Ed Vaizey heralded the Government’s five-year Digital Strategy, which was due to be published early this year, but which has so far failed to materialise.

Appearing before the Science and Technology Committee, Vaizey admitted the strategy was ready to be published in February but had been held up by Downing Street and the looming EU referendum. Responding to speculation from chair Nicola Blackwood on whether there would be funding attached to the strategy, Vaizey said there had been rumours this might appear in the Budget or spending review.

Health and Social Care

The Government has been looking at the way attendance allowance is devolved to local authorities through care budgets. Rumours indicate that the chancellor may make an announcement that attendance allowance could be devolved.

Mental Health

With stakeholders calling for ring-fencing of children and young people’s mental health there is growing speculation about the budget allocation, with some fearing that local government funding settlements will absorb any announced funding.

Following the conclusion of the children and young people’s mental health consultation in February the Chancellor may make a further announcement on this.

Social workers

While the Minister of State for Children and Families, Edward Timpson, affirmed the Government’s commitment to overhauling the way social workers are educated, rumours are circulating over Government plans for the future of social work bursaries.  Answers from ministers on implementing the Child Protection Taskforce indicate that the Government may make an announcement on innovation in social work.

Tampon Tax

Whilst EU rules on the VAT charged on sanitary products remain, the chancellor announced at the Autumn Statement that the £15 million collected from this would be donated to women’s charities. Further donation recipients will be announced at the Budget 2016.

Infrastructure

The National Infrastructure Commission will report on three projects ahead of the Budget.

The first report on Smart Power recommended the Government should pursue additional interconnectors with other European countries, with the UK becoming a world-leader in electricity storage systems.

Two further reports, on northern connectivity and transport infrastructure in London are expected imminently, which could in turn allow the Chancellor to make funding commitments on Crossrail 2 and east-west connectivity in the north.

Network Rail

Nicola Shaw’s review into Network Rail is expected to be published on the same day as the Budget, with speculation that some of the Network Rail owned stations and lines could be sold. The organisation has begun selling off its electrical power assets.

Midlands Engine Investment Fund

In the 2015 Autumn Statement the Chancellor announced an investment fund for the Northern Powerhouse. It is thought he plans to deliver something similar for the west and east Midlands, the so-called Midlands Engine, in order to improve economic outcomes for small businesses.

The fund was worth £400m to the North and a similar sum is expected for the Midlands.

Apprenticeship levy

There is likely to be more clarification about the levy provision coming into force via the Finance Bill – the consultation closed on 2 March 2016 and the Government has suggested they have been actively listening to businesses on the issue.

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