Following its surprise majority victory in May, the Conservative Government wasted no time in getting started with its planned reforms by holding an ‘emergency’ summer Budget to set the fiscal agenda for the new parliament. Historically, freshly-elected governments have opted to front-load most of the pain, hiking taxes early in the hopes of reaping benefits later to provide giveaways when they look to get re-elected. There was certainly some element of that in this Budget, though perhaps the measures were not as aggressive as some feared.
The Chancellor was quick to highlight continued economic growth in the UK with the Office for Budget Responsibility forecasts largely holding steady. Although this year’s growth forecast was trimmed 0.1% to 2.4%, the outlook for 2017, 2018 and 2019 were all revised up to 2.4% from 2.3% previously. This is more positive than the outlooks for the US and China, both of which appear to be slowing down. With the election of a Conservative Government, the deficit reduction plan remains broadly the same, though the point at which the deficit becomes a surplus has been pushed back one year to the fiscal year 2019/20. Mr Osborne also couldn’t help but highlight the risk of losing control of your debt, given events in Greece. The Government now plans to introduce legislation requiring this and future governments to run a fiscal surplus while the economy is growing strongly, to make sure the country continues to “fix the roof while the sun is shining”.
Unsurprisingly, this was clearly a very Conservative Budget and gave some hints as to which measures the Liberal Democrats were restraining whilst in coalition. Welfare spending was the main focus for cuts, as the Chancellor announced £12 billion in savings through a range of measures including freezing certain in-work benefits, limiting some tax credits and reducing the annual household benefit cap from £26,000 to £23,000 in London and £20,000 outside of London. Pensions were also the subject of some discussion, including hints at some fairly radical changes as the Government releases a green paper on the subject – our Financial Planning team gives further detail on this in their comments.
In a bid to improve the competitive business environment – perhaps with one eye on the future EU referendum – the corporation tax rate will be cut to 19% in 2017 and then 18% in 2020. Also in line with its push to enhance employment opportunities, the Government announced increases in the national minimum wage to bring it in line with the living wage and an ‘apprentice levy’ to be charged to all large companies. The levy fund pays out if a company hires apprentices – if a company employs enough apprentices, it could get more out that it put in.
The Chancellor also announced free child care proposals and an increase in the personal allowance and higher-rate Income Tax band.
As always, there will be winners and losers emerging from today’s Budget, though overall there is little impact on the fiscal outlook and there shouldn’t be a meaningful effect from an investment point of view. The reduced corporation tax rate should help promote profitability and growth in the future, though it probably remains too far off to have a material impact now. Deficit reduction plans are ever so slightly more gentle than before, but this is unlikely to rile the credit agencies that heavily influence global perceptions, and they may even approve of the ‘fiscal charter’ proposal (though its enforceability is questionable). There are no real shocks and the UK’s growth prospects continue to look reasonable against a challenging global backdrop.
This article was previously published on Tilney prior to the launch of Evelyn Partners.