Osborne sets out his stall for the parliament

The first Budget of the new parliament had quite a lot to live up to. It was the first Conservative-only Budget for nearly two decades and was billed in advance – and described by George Osborne himself – as ‘big’ and ‘bold’. So did the chancellor’s Budget on 8 July match all the hype?

 

Before answering that, let me set out briefly what I think were the three main themes of the Budget. First, and perfectly sensibly, the chancellor has concluded that deficit reduction can be achieved at a more sensible pace without risking credibility. The ‘rollercoaster’ public spending profile that we were left with after the March Budget was never going to survive, and it has gone. Achieving the Budget surplus that is intended to be the future norm will take a year longer; instead of 2018/19, it will be in 2019/20 that a £10bn surplus is projected.

 

Second, despite tying his hands on tax during the election campaign by having pledged that there would be no increases in income tax rates, VAT or NICs, Osborne still found plenty of stealthier ways to raise revenue. The Conservatives, remember, said that deficit reduction would come from spending, not taxation; so that is one election promise that has not been kept. The new dividends tax will eventually raise more than £2bn a year, vehicle excise duty reforms will raise nearly £1bn, and increasing insurance premium tax from 6% to 9.5% will raise £1.5bn. Most of the burden of adjustment will still be on spending, together with the clampdown on tax evasion and avoidance, but these are decent revenue raisers. The Treasury admits that what it describes as tax policy measures will be bringing in an extra £6.5bn annually by the end of the parliament.

 

The vehicle excise duty reform is an interesting one. The car industry has changed its behaviour in response to economic signals, including taxation, and so have consumers; in fact, their responses have put revenues from tax on a sharp downward trajectory. The changes to vehicle excise duty, under which most motorists will pay £140 annually after the first year, are intended to stem the tide of lost revenue. We may see more such changes in the future.

 

True, corporation tax was cut from 20% to 18% (by 2020) in the Budget, meaning a 10 point cut since 2010. This may be one of those taxes, though, where a lower rate could boost revenue; it may provide an incentive for multinationals to headquarter and take profits in Britain. The other tax changes in the budget were straightforward revenue raisers. An increase in insurance premium tax from 6% to 9.5% in November may or may not be passed on to customers, but the companies will have to pay it. The new dividends tax, with a rate of 7.5% for basic rate taxpayers and 32.5% on the higher rate – after a £5,000 tax-free allowance – is essentially an income tax hike on non-salary income.

 

The third main element of the Budget was the new national living wage for over-25s. This certainly was new. The new national living wage, which will begin at £7.20 an hour next April, rising to more than £9 by 2020, is a kind of super minimum wage. Just as the BBC is taking on some of the welfare bill by funding free TV licences for the over-75s, so business in general will effectively take on some of the costs of welfare, particularly tax credits, by paying more.

 

Though David Cameron had talked in speeches about ‘giving Britain a pay rise’ and Osborne had developed a new enthusiasm for increases in the minimum wage, this was a genuine surprise. Legislating for a living wage, though it is below some other calculations of the living wage, was something that business did not expect. Although it was accompanied by measures to support business, including the reduction in the rate of corporation tax to 18% by 2020 (making a 10 point cut in ten years) and NICs aimed at smaller employers, this pointed to a degree of intervention in wage-setting that people did not expect from a Conservative government.

 

That made it, to return to my original question, a bold Budget, both politically and economically. If it succeeds in forcing business to improve its productivity performance without causing the loss of too many jobs, it will be seen as a triumph. If not, it will go down as an intervention too far, though we may not know that for certain for some years.

 

 

Boldness there may have been in the budget, but not on tax or on tax reform. In this respect, the Budget was rather a disappointment. Some had hoped that Osborne would seize the mantle of Nigel Lawson and scrap tax reliefs in order to bring down rates. There was even talk about reducing the additional rate above £150,000 from 45% to 40%, though the timing would have been cack-handed.

 

In the end, though, we were left with more of the same from the chancellor, including greater tax complexity. He ploughed on with raising the personal allowance – it will go up to £11,000 from next April, alongside an increase in the higher rate threshold – but with little mention of reforming national insurance, let alone integrating it with income tax. Inheritance tax will be a minefield, following the chancellor’s announcement that the government will deliver on its pledge to raise the allowance on homes to £1m for couples, though not until 2020. Add in the factor intended to prevent older people from ‘bed blocking’ large houses – they will be allowed to take their allowance with them – and there looks to be plenty of work ahead for accountants.

 

So, it was an interesting Budget, and a big one, but certainly not one that left the tax system in a better state than it found it.