16 Mar Budget 2016
The March 2016 budget was always likely to be challenging for those on both sides of the equation. For the chancellor, the need to make £4bn of savings without tampering with VAT, Inheritance Tax or National Insurance, all of which he had made a commitment not to touch, meant to some degree he had painted himself into a corner. For the electorate, the first spring budget following a general election tends to be synonymous with the more financially punitive measures since many will largely be forgotten by the time we return to the election booths.
That said, in true Osborne style, he managed to throw in the odd crowd-pleaser such as a generous reduction in Capital Gain Tax (CGT) rates, tuning-up ISAs and eye-catching increases in tax thresholds. The cynic might suggest however that these budget-day goodies help divert attention from the missed borrowing targets and the substantial downgrades to economic forecasts. In his autumn 2015 statement George Osborne surprisingly diluted measures such as tax credits and the Police budget on the premise that the rate of economic growth in the UK was moderating, but in hindsight, this could be seen as a missed opportunity since raising revenue becomes more of a headache, and certainly unpopular, as the economy loses momentum. And so this proved, with the global slowdown leading to markedly lower UK growth forecasts.
The backdrop to the Budget had been a comparatively strong economic picture, but there were many warnings that ‘storm clouds are gathering’ and this meant it was time to practice what the Conservatives have often preached – to ‘repair the roof while the sun is shining’. The Chancellor clearly has an eye on the uncertain global outlook, continued turbulence in financial markets and a collapse in Chinese economic activity.
The other perspective on the budget was that it was notable for what it didn’t do! The chancellor had already resisted the temptation to meddle further with pension reform but the added complication this time was the impending EU referendum which meant a careful use of rhetoric and an absence of measures which might risk antagonising either side in the Europe debate. At CDC we take an active interest in the discourse and here, whilst he chose to reinforce the Tory stance on Europe, he was at pains to point out his desire not to unduly influence the debate. The tenor was however very much on tomorrow, with repeated reference to the ‘long term’ and the ‘next generation’.
We talk more about this and the other notable features below, with some brief commentary from CDC on the possible implications:
The Economy
The OBR confirmed GDP growth at 2.2% in 2015, and then moved on to forecast 2% in 2016, 2.2% in 2017, and 2.1% in 2018, 2019 and 2020. These are significant revisions downward from the Autumn statement in which they suggested growth would be 2.4% this year and would be higher in years to come.
Government spending is to be reduced by £3.5bn by 2019/2020.
The Chancellor confirmed that the Debt to GDP figure remains well above target expecting 82.6% in 2016/2017 and falling marginally thereafter over the next few years.
Additionally, there will remain a budget deficit of 2.9% next year, falling to 1.9% the following year before returning to a surplus of £10.4bn by 2019/2020.
He committed to the structural reforms previously stated and will refocus on reform of business taxes, devolution of power, infrastructure spending, education and backing “hard workers and those that save”.
Unemployment has fallen, with particular mention of the rate of decline in the North East, however, UK productivity has also been revised downwards.
Inflation is expected to come in at 0.7% this year with a significant increase to 1.6% next year, however, the Chancellor confirmed that the Bank of England’s target will remain set at 2%.
CDC Comment – The Chancellor clearly acknowledged these reductions in growth forecasts and the cynics amongst us might suggest that the more eye-catching elements to this budget were intended to divert from the gloomier growth outlook. The Chancellor was adamant that the UK is set to be the fastest growing developed economy and therefore the downward revisions could be attributable to a more pessimistic outlook globally. After all, when the tide goes out, all boats in the harbour go down. In our previous budget note we commented on the fact that growth forecasts did look optimistic but based on those forecasts, the Chancellor did have room to hold back on more aggressive spending cuts. In the immediate aftermath, sterling has weakened quite considerably.
With lower forecasts and little detail on significant spending cuts, we do question the credibility of delivering a budget surplus in such a short space of time. Whilst the ambition is admirable, the Chancellor was reticent about how such a dramatic turnaround (from a £77.2bn deficit in 2015/16 to a £10.4bn surplus in 2019/20), might be achieved.
The inflation outlook in our view remains uncertain, however, the chancellor sees a significant increase over the coming year, perhaps led by an increase in the oil price. Our question would be that if this increase does materialise, how would the Bank of England respond?
Also in our last Budget commentary, we suggested that monetary policy may begin to tighten this year, however, the Chancellor made it clear that a looser policy will be more likely this year rather than a normalising of interest rates.
This budget was predicated on the outcome of the EU referendum being positive and the UK remaining in the EU. Clearly any economic assumption made would be significantly unsettled by a different result and therefore further revision would be necessary were we to exit.
Pensions and Savings
The Chancellor backtracked on the Government’s plans to further reform pension tax relief and any possible plans to restrict pension contributions, in a move that was signposted by the Treasury just a week or so ago. This was led by calls from the industry itself which had said the rate of change was unmanageable. The Chancellor echoed this when he said that long term retirement savings should be made simpler.
ISA limits will increase significantly from £15,240 this year to £20,000 from next April.
A Flexible Lifetime ISA will be introduced for the under 40’s who will be able to save up to £4,000 per annum with a government contribution of £1 for every £4 saved (until age 50), meaning the maximum saved will receive an additional £1,000 Government contribution. This will be tax free in retirement but can be accessed anytime, though this would be without the application of a bonus and a likely small charge to do so.
CDC Comment – Much had been anticipated in relation to further pension reform, however, following a Treasury briefing earlier this month, commentators suggested a stalling in pension legislative change and so it proved. Despite a barbed comment about abolishing the Liberal Democrats rather than the Lump Sum, there were no further developments of note.
Savers are being catered for in the introduction of the savings tax allowance from April this year as previously announced.
The big news came in the introduction of a Flexible Lifetime ISA for the under 40s. This is some recognition of the fact that this demographic is falling behind in terms of long term saving and retirement provision. This is a generous addition to the savings landscape and with the increase in the ISA allowance to a straightforward £20,000 (at last a round figure), there is much to cheer. However, it remains the fact that the cost of living is such that many simply cannot afford to save and therefore, no matter what incentives are offered, the savings rate may remain low.
It is likely that the introduction of the Flexible Lifetime Allowance is a precursor to more radical change in pension savings. The Chancellor has made no secret that he is considering an ISA style pension system and this could be seen as confirmation that this is a future path in reforming pensions.
Taxation
The Government is committed to shutting down disguised remuneration schemes and the much discussed limiting of Personal Service Companies was announced.
Tax evasion and avoidance will come under further scrutiny with the Chancellor expecting to raise £12bn by further tackling these issues.
The ambition of a low business-tax regime creating a level playing field for smaller business was a key component of this budget. The Chancellor announced further measures on business’ ability to redirect company earnings and profits to a lower tax regime and also capped interest relief on borrowings. Additionally there will be a strengthening of withholding taxes on the payment of royalties overseas.
Corporation tax will further reduce and by April 2020 should reach 17%.
Business rates will be reduced and altogether abolished for some small businesses. The Chancellor also announced an extension of his residential “Sliced” approach to stamp duty to the commercial market, which he expects will mean 98% of purchasers will pay less.
Insurance Premium Tax will increase by 0.5%, which is lower than some forecasters had suggested.
Personal tax rates and allowances received some attention. The personal allowance will rise to £11,500 and the level at which individuals will pay higher rate tax will increase to £45,000. Both will take effect from April 2017.
Unexpectedly, Capital Gains Tax rates were reduced from 18% for basic rate tax payers and 28% for higher rate tax payers to 10% and 20% respectively.
CDC Comment – The focus initially appeared to be on the continuation of business tax reform favoring smaller businesses over their larger rivals, but there were also some very interesting tax reforms for individuals.
The Chancellor made much of mitigating small business taxes and tackling large business tax avoidance, which to a “nation of shopkeepers” will not only be welcome, but also politically savvy – for which the Chancellor is building a growing reputation.
The continuation of the increases to personal allowance and the limit at which individuals will begin to pay higher rates of tax will be well received. But undoubtedly, it is the changes to Capital Gains Tax (CGT) Rates that will be the headline-grabber. This was not expected at all and whilst for many this might not seem too significant, for us in the investment world this is a very attractive move. It is important to note that he also announced, furtively, that this would not apply to residential property which retains the existing rates, so nothing too exciting for those with second (or multiple) properties sitting on significant capital gains.
Note: Tax and Estate planning services are not regulated by the Financial Conduct Authority
Other Points
In recognition of the difficulties facing the Oil and Gas industry, measures were announced to support the industry with the halving of the supplementary tax to 10%
Plan to convert all primary and secondary schools to Academies by 2020, along with plans to boost the performance of schools in the North.
Sugar Levy on soft drinks industry introduced in two years, giving organisations time to adapt, with the aim of tackling childhood obesity. The expected £520m raised to fund greater sports participation on primary and secondary schools.
Fuel duty will be frozen, as will Alcohol duty on beers and ciders
Tobacco will increase by 2% above inflation from Midnight
The Northern Powerhouse
Infrastructure spend to increase with particular focus on the North including a high speed rail link (HS3) between Leeds and Manchester
Improvements for the M62 and an alternative route from Manchester to Sheffield
Importantly for our region, much needed improvements to the A66 and A69 linking East and West.
Cross-rail 2, connecting the North to London
Risk warnings
Certain disciplines and activities are not regulated and these are highlighted in the relevant parts of this newsletter