TheCityUK Responds to the July Budget

In the first purely Conservative Budget in nearly two decades, Chancellor George Osborne presented a ‘bold’ vision against a backdrop of increasing political and financial uncertainty in the Eurozone, downside risks to global economic growth and slowing growth in the UK (GDP expanded by 0.4% in Q1 2015, down from nearly 1% in each of the previous three quarters).

The OBR revised down slightly its forecast for UK GDP growth in 2015, to 2.4% from 2.5% in its March forecast, and maintained the forecast of 2.3% growth in 2016. Although the Chancellor sought to use the situation in Greece to demonstrate the need for continued fiscal consolidation in the UK, the comparison does not take into account the many fundamental differences between the two countries, including the advantages the UK—unlike Greece—enjoys by having its own central bank, controlling its own currency and having most of its debt held domestically.


As expected, the Budget’s main focus was on continued fiscal consolidation, pursued with the intention of moving the UK’s fiscal position from deficit to surplus and ensuring a decline in the debt-to-GDP ratio. In a new Fiscal Charter, the Government sets out the details of the fiscal rule that was announced last month, which stipulates that the Government should run budget surpluses in ‘normal’ times. ‘Normal’ has now been defined as all times except those when real GDP growth is below 1%--or, in the words of the Chancellor, when the economy is not in “a recession or a marked slowdown”.

Forthcoming research from TheCityUK’s Independent Economists Group1 notes that the implementation of binding fiscal rules is fraught with difficulty arising from the complexity of fiscal policy and the need to include allowances for scenarios outside of baseline economic forecasts. In the UK, the implementation of a fiscal rule will be particularly challenging because of the decision to ring-fence large parts of planned Government expenditure. In a noteworthy change to previously announced policy, however, the Budget moved the target date for achieving a fiscal surplus to 2019-20 from 2018-19. Given that the UK’s budget deficit is structural, not cyclical, eliminating it will present a serious challenge.

To achieve this goal, the Budget outlined a mix of spending cuts and tax rises. Some of the new policies will make it more difficult to reduce the budget deficit by reducing tax revenues—for example, the decision to raise the personal-allowance threshold to £11,000 and the threshold at which the 40% rate of income tax is applied to £43,000 from 2016. Set against this are some policies designed to reduce government spending, such as the paring back of tax credits and benefits payments. The net effect of these changes on the public finances will only be known in due course, since at this stage it is impossible to know the knock-on effect these changes will have on employment and consumption, which would in turn affect revenue collection. However, crucial sources of revenue such as income tax and VAT—which together account for about half of total government revenue—were left unchanged, placing more of the burden of fiscal consolidation on other, more targeted policy areas.

For example, the Budget promised to raise £7.2 billion from the implementation of various tax-avoidance and tax-evasion measures. TheCityUK has consistently put forward the view that firms must pay the tax for which they are legally liable, and we believe that the implementation of measures to clamp down on tax evasion and avoidance will reinforce the message that no companies are above the law.


The Budget policies will have mixed effects on industry as well as on the broader economic environment. This is evident, for example, in the changes to taxation of the banking sector. In TheCityUK’s Representation to HM Treasury ahead of this Budget, it was noted that the bank levy has reached a rate that now represents a disincentive for firms—particularly international firms—to continue operations in the UK. We called for the Government to recognise the risk that the bank levy might appear beneficial in isolation, but that the policy may impose negative externalities which might, in the aggregate, outweigh any prudential and revenue-raising advantages. We therefore note the announcement that the Government plans to gradually reduce the bank levy rate over the next six years, leaving it at 0.10% by January 2021. The decision to apply it at that point to domestic balance sheets only will affect different banks in different ways, depending on their business models, and so the net effects in terms of both revenue collection and the shape of the sector (insofar as the policy change may end up favouring some business models over others) will be evident only after some time. HM Treasury should, therefore, consider the effects of this change well before the six-year transition period concludes, with a view to both possible unintended consequences and anti-competitive outcomes. The new 8% surcharge on bank profits, meanwhile, implies that a relative loss of banking-sector competitiveness is a trade-off being undertaken with a view to deficit-reduction. Although it is preferable to base the levy on profits rather than assets, the Government should monitor closely the practical effects of the surcharge so that the tax does not damage the UK’s attractiveness as an international financial centre. The same trade-off could be said of the decision to reduce pension-tax relief (which the Budget notes has been taken to offset the budgetary impact of cutting inheritance tax).


TheCityUK’s Representation to HM Treasury emphasised the need to examine long-term savings policy, so the Budget’s explicit linking of saving and long-term investment was laudable. A new consultation of pension-tax policy may be useful, particularly if any further changes to the tax regime will create a fairer and simpler system and one which incentivises saving for the majority of people. However, pensions policy has been subject to myriad changes in recent years, and so the Government should bear in mind that in order to be competitive and effective, the industry requires policy stability.

The need to pay close attention to the effects of the insurance premium tax and withholding tax is also paramount, since these are changes that will affect the end customer and investor. Once again, the possibility of unintended consequences should be borne in mind.


The so-called ‘productivity puzzle’—evidence of sustained economic growth coupled with declining productivity—is a cause for concern because of the link between productivity growth and wage growth. Since competitiveness is a relative measure, sustained productivity growth is also a key requirement for maintaining the UK’s position as one of the world’s leading developed economies.

Analysis of the UK productivity puzzle has been extensive but inconclusive owing to the complexity of the issue, the difficulties of measuring economic inputs and intangibles, and the large number of hypotheses about the source of the problem and its potential solutions. Research published by TheCityUK in 20132 noted that the productivity gap most likely has both structural and cyclical causes; it then follows that new policies that seek to boost productivity must include long-term structural reforms.

The Budget’s focus on transport infrastructure and skills—two key areas where investment is most likely to increase the long-term productive potential of the economy—is therefore very welcome. However, the proposal to fund more investment in roads through a new vehicle excise duty is a modest one, proposing as it does to raise £6.2 billion in 2020—the first year in which the revenue will be allocated to the road-investment fund. Moreover, TheCityUK’s research3 has shown that infrastructure investment depends not only on adequate funding, but also—indeed, more so—on choosing the right projects and ensuring high standards of project management and planning.

A focus on infrastructure investment should also extend beyond roads—particularly given the Government’s stated desire to boost the economic contribution of the UK’s various regions to complement—not detract from—the economic strength of London. It is right, fair and urgent that all parts of the UK—not just London and the South East of England—see job creation and economic growth. The financial and professional services industry, for example, employs 2.1 million people in the UK—two thirds of whom work outside London. On average, these employees contribute £85,000 per year to the economy–70% more than the average for other industries–and together they contribute 12% of UK GDP. Expanding airport capacity and improving the quality of rail links is a necessary foundation for a balanced, sustainable economic recovery that will create valuable jobs and sustain the UK’s international competitiveness, and so TheCityUK would have liked to see this issue addressed in the Budget.

Meanwhile, another part of maintaining the UK’s international competitiveness involves ensuring that the country has a skilled workforce. The support for apprenticeships announced in the Budget could play an important role in early-stage training and development to fill future skills gaps, including those in the financial and related professional services sector. However, the sector has long demonstrated a commitment to training and skills development, and so, while TheCityUK supports the Government’s emphasis in this area, it recognises that the private sector can and should continue to set a proactive example in this regard. Professional institutions, for example, have a membership of around 1 million people, of which about one-fifth are from overseas.

Moreover, since training and apprenticeships strengthen the labour force only over the medium term and cannot address existing shortages of skilled labour, it is important for immigration policies to support the long-term competitiveness of UK businesses. A supportive immigration policy would help ensure that the UK can continue to export financial and professional services expertise by allowing international firms to bring non-UK workers to the UK for periods of time. It would also allow international businesses to maximise their contribution to the UK economy by permitting them to transfer to the UK senior staff from their countries of origin.

The decision to cut the corporate tax rate cut to 19% in 2017 and 18% in 2020 will further support the UK’s competitiveness in tax policy relative to other G7 countries, all of which currently levy a higher rate of corporate tax than the UK’s existing rate of 20%.

Finally, the decision to establish an Office of Financial Sanctions Implementation that will—in collaboration with law-enforcement agencies— work with the private sector is an important development. It will assist UK financial and related professional services businesses to have access to the most relevant and up to date information that may affect their commercial operations. The Government, meanwhile, should be able to hear from the financial and related professional services industry what the potential effects of proposed new or changed financial sanctions regimes would be, in order to avoid unintended consequences that might be ineffective or even harmful.

The Economics of Fiscal Policy, TheCityUK Independent Economists Group, forthcoming, August 2015
UK Productivity Trends: How Are They Influenced By Financial Services?, TheCityUK Independent Economists Group, May 2013
See, for example, Long-Term Finance for Infrastructure and Growth Companies in Europe, International Regulatory Strategy Group, March 2015.