Having focused so much on the continuing need to repay the debts of the past, many might have expected that the chancellor would be forced to stick to the mantra of yesterday being ‘merely’ an economic statement. Instead, in what was clearly a mini-Budget, we saw 59 measures announced which, taking into account cuts in spending, were neutral over the six years of the forecast, but nonetheless included a wealth of eye-catching measures.
How did the chancellor get his sums to add up?
To achieve fiscal neutrality over the forecast period, the chancellor used spending cuts to cover a net tax reduction. From a tax perspective, the Budget was broadly neutral for the current and next year, before raising money in the year of the election, which it gives away in the last three years of the forecast.
Despite the flat position overall, the chancellor created the opportunity to spend over £11bn, predominantly by raising over £9bn from tackling tax avoidance and increasing the levy on the banks.
The government has spent the money raised by focusing over £6bn on the cost of living (with cuts in fuel duty costing over £3bn, £2.5bn for married couples, and energy grants, etc of a further £1bn). Another £2.5bn was spent on business rates and a further £2bn on employment (through a cut in national insurance for under 21s).
How significant are the reforms of business rates?
One of the most eye-catching announcements by the chancellor was the suite of measures designed to provide help for the UK high street. By spending over £1bn next year on business rates, the chancellor has shown that he has been listening to the pain felt by businesses through a system that has its origins in the Poor Laws of 1601 and was updated in 1990 alongside the introduction of the poll tax.
By capping the increase next year at 2%, as well as extending small business relief and introducing a measure targeted at lower rated retail properties, the government has reduced the immediate burden, perhaps in an effort to provide time for it to consider further reform.
The commitment to a review for changes in 2017, is arguably as important for driving growth for businesses in the UK – getting the system to be one that drives entrepreneurship, and investment, rather than being a millstone that constrains business. Whilst the announcement focuses on options for longer-term administrative reform, many will be arguing that the review needs to be both accelerated and more fundamental.
What were the other most significant tax cuts?
Another significant tax cut story was around the abolition (from 6 April 2015) of employer national insurance contributions for the under 21s earning up to the upper earnings limit of £42,285 (£813 per week). The move is set to spark a rise in the popularity of employer school leaver schemes, with the biggest beneficiaries expected to be those in the hospitality and retail industries.
Were there any hidden surprises?
The chancellor announced the bulk of his revenue-raising measures around avoidance, tax planning and fairness (£7bn); fraud, error and debt (£2m); and the bank levy (£2.5bn) in two short sections of his speech. Whilst there are a total of 12 distinct tax-raising avoidance measures, most were only very briefly alluded to in the speech, with the highest profile being given to the introduction of capital gains tax on future gains made by non-residents who sell residential property in the UK, which accounts for only 1% of these revenues. More significant revenue is expected to be raised by further actions against the use of intermediaries to avoid employment taxes and the extension of action against the abuse of partnerships.
Can we expect hand-outs ahead of the election?
Whilst the upturn in the economy is bringing borrowing down faster than was thought likely at the time of the Budget, the OBR stressed that this is a cyclical rather than an underlying improvement, signalling that this is not an opportunity for a fiscal relaxation. The chancellor seems to concur – his measures reduce borrowing by about £2bn in the near term, then give some of this back over the next three years, but it is basically a recipe for four more years of austerity.
However, with only three more fiscal events to go before the general election, it would, to say the least, not be surprising to see some relaxation of this stance in the near future, as the chancellor seeks to weigh up the political payback for fiscal credibility versus cash in pockets.
What’s next?
The draft 2014 Finance Bill will be published for consultation on so-called ‘legislation day’ or ‘L-Day’: Tuesday 10 December. The date for Budget 2014 has not yet been published.
