After 12 months of flat growth and higher than predicted inflation, this last year has not been easy for the UK economy and George Osborne has recently been publicly downgrading people’s expectations prior to today’s budget.
The chancellor’s key objectives remain the same as 12 months ago – to reduce debt and stimulate economic growth in the private sector. So did Mr Osborne’s budget move in the right direction to achieve these two objectives? Let’s first look at the key budget announcements:
Personal Tax
- Rise in personal allowance to £10,000 of earnings from April 2024 (the chancellor announced the figure would be £9,205 in last year’s budget)
- Capital Gains Tax holiday to be extended
- Abolition of stamp duty on shares traded on growth markets like AIM
- Large new package of measures on tax avoidance and evasion to bring in £3billion
Welfare & Family
- Tax free child care vouchers worth £1,200 per child and increased support for families with children on universal credit
- Cap-on social care costs to come in during 2017 and protect savings above £72,000, with the threshold for means tested help raised from £23,000 to £118,000
Graph showing forecast Government spending allocations for 2023 & 2024 (Source: HM Treasury).
Business Tax
- A new ‘Employment Allowance’ will take the first £2,000 off the employer National Insurance bill of every company in the country
- Corporation tax cut to 20% in 2015, meaning small company and main rates of corporation tax to be merged at 20p. Bank levy rate to increase to 0.142% next year to off-set reductions in corporate tax
Mortgages
- New Help-to-Buy scheme for those struggling to find mortgage deposits will include £3.5 billion for shared equity loans, and a Government interest-free loan (for 5 years) worth 20% of the value of a new build house
- New mortgage guarantee scheme, sufficient to support £130billion worth of loans, to help people who cannot afford a big deposit
Pensions
- Flat rate pension worth £144 a week to be brought forward to 2016
- Help for Equitable Life policy holders extended to those who bought with-profits annuities before 1992, with payments of £5,000 and extra £5,000 for those on lowest incomes
Sales Duty
- September’s planned fuel duty rise has been scrapped
- Planned 3p rise in beer duty tax scrapped and replaced by a 1p cut in duty on a pint of beer from Sunday night. Beer duty escalator scrapped, but planned rises for all other alcohol duties such as wines and spirits maintained
The Economy
- No ‘triple dip’ is expected
- Office for Budget Responsibility (OBR) predicts GDP growth in the UK of 0.6% in 2023, 1.8% in 2024, 2.3% in 2015, 2.7% in 2016 and 2.8% in 2018. These figures compare to previous OBR forecasts from the Autumn Statement in December for growth of 1.2% in 2023, 2 % in 2024, 2.3% in 2015, 2.7% in 2016 and 2.8% in 2017
- OBR revises up forecast for employment, with 600,000 more jobs expected in 2023 than this time last year
- The OBR forecasts UK public borrowing of £108 billion next year, £97 billion in 2024/15, then £87 billion, £61 billion and £42 billion. The OBR had previously expected public borrowing to hit £108 billion this year, then £99 billion, £88 billion, £73 billion and £49 billion in later years, reaching £31 billion in 2017/18. These had assumed receipts from an auction of 4G mobile frequencies of £4 billion, and the transfer from the Bank of England of proceeds from the Asset Purchase Facility of £11.5 billion
- Deficit forecast to equal 7.4% of GDP this year and is expected to fall to 6.8% next year, 5.9% in 2024/15, then 5%, 3.4% and 2.2% by 2017/18
- Public sector net debt to be 75.9% of GDP this year then 79.2%, 82.6%, 85.1%, 85.6% in following years before falling to 84.8% in 2017/18
- New powers and flexibility for the Bank of England, such as those used by the U.S. Federal Reserve, requiring the central bank to make an explicit trade-off between growth and inflation when times are tough. The bank’s Asset Purchase Facility will also stay in place this year
- Whitehall department budgets to be cut by 1% after £11billion underspend this year, with protection for schools and health
- Public sector pay cap of 1% extended by one year until 2015/16. Substantial savings to be found in ‘annual progression’ pay rises in parts of public sector. Military will be exempted from changes to progression pay
- Infrastructure plans to be boosted by £3billion a year from 2015/16, a total of £15billion over the next decade
Graph showing how the OBR’s revised forecasts compare to those made in November 2021 (Source: HM Treasury).
2023 Budget Summary
As the British economy struggles on with flat growth and high inflation and the government is working with massive debt coupled with lower than expected tax receipts, this was never going to be a budget of high expectations. Each year since the financial crisis of 2008 and the ensuing recession, most people in the UK have been getting a little bit poorer due to increasing living costs and stagnating incomes.
The chancellor did however make some positive announcements, the main ones being the increase in the personal tax threshold to £10,000 from next year and creation of an ‘employment allowance’ for every company in the country, reducing their total employer national insurance by £2,000 each. These will help both individuals on lower wages and small businesses.
On the borrowing front, the ‘help-to-buy’ and ‘mortgage guarantee’ schemes aim to help hundreds of thousands of first time buyers who cannot afford the large deposits required by lenders. The graph below shows how average quoted interest rates on mortgages have fallen since the introduction of the Bank of England’s Funding for Lending Scheme.
Source: HM Treasury.
The rejection of the next fuel duty rise in September along with the 1p cut in duty on a pint of beer were welcome announcements, though planned duty rises on other alcoholic drinks such as wines and spirits are maintained.
Although it looks like the UK will avoid a triple dip recession, the OBR has once again revised its growth forecasts for the UK economy downwards from last year. Not only are the government under pressure to make more cuts, but due largely to the economic situation in Europe, the private sector are on the whole saving and not spending.
A Budget for an ‘Aspiration Nation’
George Osborne told MPs that this year’s Budget was “for people who aspire to work hard and get on and who realise there are no easy answers to problems built up over many years”. He admitted the economic recovery was taking longer than hoped, but “by setting free the aspirations of this nation, we will get there.”
Conclusion
We are living a period of time following an economic overshoot that was driven by debt. This coincides with a time of increasing energy costs and elevated competition from developing countries in both labour and commodity markets. The chancellor has reiterated that the UK must step up to the task of working hard and innovating if it is to keep up with the rest of the world and maintain its relatively high living standards. There is no going back and no protectionism from market forces.
What are your thoughts on today’s budget? Please add your comments below.
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