In his final Budget before the General Election, the Chancellor today presented an economic statement whose positive tone stood in notable contrast to previous statements.
Buoyed by the recent sharp decline in consumer price inflation - which fell to just 0.3% in January - the Government will enjoy lower spending on inflation-linked bond and benefits payments. Over the medium term, low inflation could boost consumer spending by raising discretionary incomes, and this would in turn support higher tax revenues, providing the foundation for a more optimistic fiscal forecast than previously envisioned: the OBR has revised down its forecast for the budget deficit by more than £1bn, to £90.2bn in 2014/15.
Faster economic growth would also improve the headline deficit number, and the OBR now believes that real GDP growth will average 2.5% in 2015, rather than the 2.4% forecast it published in December. This improvement was partly on account of a downward revision to the growth figure for 2014, to 2.6% from 3.0% originally. The relative optimism around the state of the public finances is tempered by the fact that the OBR expects the deficit to reach £90.2bn in 2014/15– more than 40% lower than it was in 2010, but still over £50bn higher than the Chancellor had budgeted for five years ago.
This perspective, as well as the ambitious goal outlined in the 2014 Autumn Statement - reiterated in today’s Budget - of achieving a budget surplus by 2019/20 reinforces the Government’s call for a longer than anticipated period of fiscal consolidation. To this end, the new Charter for Budget Responsibility, which makes legally binding the commitment to continued improvement in the public finances over the next three years, was approved by an overwhelming majority in Parliament in January.
The more positive economic outlook nevertheless provided the foundation for the Chancellor to change tack, his rhetoric about fiscal consolidation notwithstanding. For example, the Chancellor announced an increase the personal allowance to £10,800 in 2015/2016 and £11,000 in 2016/2017, from the current £10,000. The threshold at which people start paying the higher-rate tax band would be increased to £43,300 from 2017/18. The current 40% income tax threshold is set at £41,865, and is set to increase to £42,385 next month. In addition to potentially spurring consumption, these effective tax cuts will help to ensure the UK’s continued competitiveness as a place for highly-skilled employees to live and work.
Indeed, the Budget reflected TheCityUK’s agenda of international competitiveness. On 16 March the Treasury announced that it would commence a 12-month review of business rates, which TheCityUK hopes will result in new or amended policies that would reduce the tax burden on small businesses, especially in light of our consistent call for policies to support growth by promoting small and medium-sized enterprises. In addition, the Budget announced a cut in the corporation tax rate, to 20%.
TheCityUK is pleased to have been invited by the Chancellor of the Exchequer to undertake an independent practitioner-led review of the European Listings Regime. This will both respond to the European Commission’s Prospectus Directive Consultation and provide a comprehensive report setting out more ambitious recommendations to develop a truly pan-European listings regime. The review aligns with the European Commission’s commitment to develop a Capital Markets Union (CMU) and will make recommendations on how the current regime could be improved to advance the goals of a CMU for all 28 EU Member States. It will, in particular, take a view on improving the regime for new listings, especially for growth companies. Other issues to be examined include the continuing obligations of listed issuers, which are also relevant to the CMU goals of making capital markets well-regulated and appropriately accessible.
TheCityUK had, in its Representation to Treasury, called for reforms to support individual savers, and so we welcome the set of measures announced by the Chancellor in this regard. This includes:
- The new personal savings allowance – with first £1,000 interest on savings income to be tax-free
- The increase to the annual savings limit for ISA to £15,240
- The "Fully flexible" ISA which will allow savers to withdraw money and put it back later in the year without losing any of their tax-free allowance; and
- The new "Help to Buy" ISA for first-time buyers where the government has pledged to top up by £50 every £200 saved for a deposit.
The Chancellor’s commitment to investment in transport infrastructure in the South West is very positive. The South West plays host to a large cluster of financial, accounting, legal and management consulting firms, which employ over 150,000 people and collectively represent around 10% of the regional economy. The region also houses the operations of a diverse range of businesses, particularly building societies and insurers. TheCityUK has long emphasised the vital role that financial services play in driving growth and job creation–both directly and indirectly–across the UK as a whole, not just in London and the South East; nearly 70% of the two million people employed in the UK by the industry work outside of London. Moreover, TheCityUK has advocated that the Government encourage economic growth by ensuring that policy facilitates infrastructure investment—for example, by supporting the private sector in the selection of investor-friendly infrastructure projects.
TheCityUK has consistently put forward the view that firms must pay the tax for which they are legally liable. Because of this, we welcome the measures announced in today’s Budget that will penalise firms facilitating tax evasion and crack down on offshore tax evasion. The implementation of these measures will reinforce the message that no companies are above the law, and will have the added benefit of contributing a further £3.1bn to Government revenues, according to official forecasts.
Other highlights of the Budget included:
- Continuing reforms to the pension sector that address the UK’s demographic challenges and enable individuals to make better choices about their retirement savings
- Extra resources for UKTI designed to increase support for British exporters with links to China
- An extension of the small business rate relief
Overall, the Chancellor struck a delicate balance between maintaining a message of fiscal responsibility consistent with his previous Budgets, and incorporating the recent positive economic data. These data allowed the Chancellor to emphasise themes of continued recovery from the 2008-09 financial crisis and, above all, economic security. The Budget is squarely focused on the twin pillars of macroeconomic stability: long-term economic growth and sustainable public finances. TheCityUK believes this focus on fundamentals is highly appropriate, since risks to the economy are abound - as demonstrated by the OBR's downward revisions to the forecasts for global growth and world trade.