However many numbers feature in the chancellor’s Red Book, 
the one that really counts is 50 – the number of days between the Budget
However many numbers feature in the chancellor’s Red Book, 
the one that really counts is 50 – the number of days between the Budget and the election. For such a small number, it has had a very big effect.
In most other pre-election Budgets, the numbers in the chancellor’s ring binder would have given him plenty of room for manoeuvre and the scope for some impressive ‘giveaways’. However, the Office for Budget Responsibility’s forecast was more cautious than many would have expected, with just a 0.1% upward revision to 2015 growth and a rate of 2.3% for 2016, figures that the EY ITEM Club believes could be beaten in practice by some distance. This somewhat pessimistic view by the OBR means that the main revenue effect of the fall in oil prices is to reduce North Sea tax revenues by £2bn a year over the medium term, without much of an offset by other tax revenues. The main improvement is on the expenditure side, through the effect of lower inflation and interest rates on debt interest payments.
The chancellor used the improvement in the public finances to reduce borrowing. Debt starts to fall as a share of GDP in 2015/16, helped by sales of Lloyds Bank shares and other banking assets, which raise £25bn in 2015/16, rising to £30bn in 2016/17. This fall begins a year earlier than forecast by the OBR in December, but in line with the objective the chancellor set out in his June 2010 Budget.
However, the big change relative to December is that austerity is anticipated to come to an end a year earlier, in 2018/19. This allows both an increase in spending in 2019/20, in time for the 2020 election; and for the chancellor to sidestep the OBR’s observation, made at the time of the Autumn Statement, that spending would fall back to the level of the 1930s. At 36% of GDP, total public spending will be back to the ratio seen in the year 2000 under Gordon Brown.
Even with the constrained approach of the OBR, the chancellor was ideally placed to target significant sums on a few vote winners. Except that he wasn’t, and for two reasons.
The first has to do with the coalition. Its days may be numbered (say, ten, if we give it until the signing off of the Finance Bill), but it is very much a presence in this Budget. On the one hand, it limited the range of options that Osborne could pursue to those he could agree with his Lib Dem partners; while, on the other, it has probably made him reluctant to spend good money on measures where the Lib Dems would share the credit. The second has to do with Osborne himself, as broad political strategist rather than narrow finance minister. His aim here is clearly to win the election campaign, rather than delivering short term sweeteners to the electorate.
The recurring themes through the Budget speech were about sticking to the plan and prioritising deficit reduction. That in itself was enough to rule out wholesale giveaways, while still leaving scope for some interesting, but targeted, hand outs.
Overall, we saw a net giveaway over the £140m in aggregate, being broadly neutral in the grand scheme of things. There were 43 measures in this Budget, of which 16 were tax reforming and 10 focused on fairness, evasion and avoidance. Interestingly, there are twice as many measures from Budgets past that are yet to come into force than are delivered by this Budget. The message from this Budget is clearly ‘don’t panic!’ and to stick with the current plan.
In short, it was voters. In line with the chancellor’s overall philosophy that we should be a nation of savers and investors, rather than of borrowers, the Budget includes several measures to reward and support savers. These include:
more flexible access to annuity pots for pensioners;
help for those saving for a home through the new help to buy ISA;
greater ISA flexibility; and
the promise of a new tax allowance that will lift most people out of tax on savings.
Add to that the increase in the personal allowance (more on that later) and you have some positive changes for many of the electorate.
Another ‘winner’ (at least in terms of tax reductions) is the oil industry, currently facing pressure from falling oil prices. Here we see:
a new investment allowance (replacing all the existing field allowances and so-called brown field allowance with a cost based, basin-wide allowance);
reductions in petroleum revenue tax from next year; and
the return of the supplementary charge (backdated to the start of the calendar year) to the pre 2011 rate of 20%.
This is a big step towards creating the correct fiscal regime for the long term exploitation of the UK’s natural resources. The OBR estimates that it will boost expected North Sea oil production by 15% by the end of the decade.
In another crowd pleasing measure, duty on beer, cider and spirits has been cut, while that on fuel and wine has been frozen.
There is no clear, big ticket boost for business, rather a steady-as-she-goes approach of recommitting to the 20% CT rate, continuing to back venture capital schemes and enterprise investment schemes, some additional relief for the creative industries and orchestras, and a promised, but not priced, retention of the annual investment allowance at something more than £25,000. There was also some minor tinkering with the ‘jobs tax’, providing a break for the self-employed with the abolition of class 2 NICs.
More widely, the chancellor has offered a fundamental review of business rates in time for Budget 2016 and the revaluation in 2017. While this offers the opportunity for this tax to be reformed, the constraint that the outcome of the review must be revenue neutral is disappointing, particularly when other countries are reassessing where the tax burden arises. So the main gift for business in this Budget is the promise that the recovery will be protected and the conditions for growth maintained.
The main losers were: bankers and tax avoiders. Bankers took another hit with the bank levy rate raised to 0.21% (raising an extra £920m per annum) and the denial of corporation tax relief for compensation payments. Taken together, these are expected to deliver £5.3bn over the forecast period.
Avoiders and evaders (increasingly being lumped together, along with other measures related to ‘fairness’) were the targets of 10 of the 26 tax measures in the Budget, including:
a commitment to the common reporting standard (the OECD’s flagship anti-evasion mechanism, building on the transparency that the US is seeking through FATCA);
tighter rules around entrepreneurs’ relief; and
the adoption of the diverted profits tax.
In confirming the introduction of the diverted profits tax on 1 April, the chancellor has been unflinching in his timetable, if somewhat adjusting his approach to narrow the notification requirement and clarify rules for giving credit for tax paid, the operation of the conditions under which a charge can arise, specific exclusions and the application of the DPT to companies subject to the oil and gas regime.
The chief secretary to the Treasury, Danny Alexander, was due to announce further measures to tackle evasion, on the day after the Budget.
The lower paid could be said to be losers, due to the decision to press on with reduction to the personal allowance. This will deliver an uplift for many, but those at the bottom of the income distribution will see no benefit (the median of those in the lowest decile earn £2,000 less than next year’s £10,600 allowance). For this group, an increase in next year’s national insurance lower earnings threshold of £8,060 would have been preferable.
The main source of innovation in this Budget is in the realm of tax collection, with the announcement that the annual tax return is on the way out, to be replaced by digital tax accounts for five million small businesses and ten million individuals. These changes were announced earlier in the day, and a roadmap setting out the administrative changes is promised. This will deliver the pre-population of tax returns, with the idea being that, for many, personal tax compliance will now be more about checking for completeness and accuracy than gathering and entering data.
The main non-barking dog this time round (closely related to the shot fox from earlier Budgets) was the much trailed increase in the inheritance tax threshold to £1m. Another was the novel idea of introducing a tobacco levy (still in need of some refinement, apparently). We can expect both of these to return.
Usually, this section would include a slightly procedural account of the process from Budget to Finance Act. This year is different, as we will have at least two Finance Bills. The first will be published on 24 March and cover many of the Autumn Statement and Budget measures (including the DPT); but any hope of further debate will be short lived, as the Bill will pass from the House of Commons on the very next day. This will propel the Bill forward for Royal Assent before Parliament rises at the end of the month, clearing the way for what really happens next – the election.
By opting for a Budget which makes us feel safe (by telling us the recovery is secure) rather than feel good (by giving us goodies), the chancellor has staked out a key battleground for the upcoming campaign. His basic pitch is that the long term plan is delivering, and anything that deviates from that is going to return the UK back to crisis. By denying himself recourse to ‘giveaways’ in this Budget, he aims to deny his opponent recourse to them during the campaign. The drôle de guerre is over; let the battle commence!
