20 May Budget Update March 2014
George Osborne’s fifth budget focused on the ‘makers, doers and savers’ and was presented in the context of an improved economic picture, when compared to 2013. Whilst he was bound by borrowing targets, a ‘give-away’ budget was always unlikely, but despite this, the Chancellor did provide a few sweeteners, undoubtedly motivated by an election on the horizon.
Overall the budget appears neutral, though the aim is to rebalance the economy towards savings, investment and exports. The area that caught most commentators by surprise was the sweeping shake-up of pension reform where Mr Osborne has significantly increased the flexibility for those building for or planning retirement. Below is a summary of the key highlights:
Economy
• Office for Budget Responsibility (OBR) confirms economy grew by ‘three times as much’ as forecast 0.6 per cent in 2013.
• OBR predicts 2014 GDP growth of 2.7 per cent, then 2.3 per cent in 2015, 2.6 per cent in 2016 and 2017, and 2.5 percent in 2018.
• Borrowing expected to be £108 billion this year – £12 billion less than forecast a year ago.
• OBR predicts borrowing will fall to £95billion in 2014/15, then £75billion, £44billion and £17billion in subsequent years with a surplus of almost £5billion in 2018/19.
• Borrowing forecasts mean the UK will borrow £24 billion less than previously predicted over the period.
• OBR revises down national debt to 74.5 per cent of GDP this year, then 77.3 per cent next year, reaching a peak of 78.7 per cent in 2015/16 and falling to 78.3 per cent, 76.5 per cent and 74.2 per cent in following years.
CDC Comment – the recovery is clearly gathering pace and is feeding into public finances with a £24bn improvement in borrowing compared to December’s forecasts. However, the Chancellor revealed limited progress in tackling the structural deficit and it is unlikely this will be eradicated by growth alone. Overall there is nothing to set alarm bells ringing at the Bank of England but more tough decisions are needed on public spending. The conundrum is how these can be stage managed to limit electoral damage.
Business
• Direct lending from government to UK businesses to promote exports doubled to £3bn and interest rates on that lending cut by a third.
• Business rate discounts and enhanced capital allowances in enterprise zones extended for three years.
• OBR revises down forecast tax receipts from North Sea oil and gas by £3billion.
• Housing policies announced today to support more than 200,000 new homes.
• Additional £140million made available for repairs and maintenance to flood defences.
• Additional £200million for potholes.
• Annual investment allowance doubled to £500,000 and extended to the end of 2015.
• The 2 per cent increase in company car tax to be extended to 2017 and 2018, with increased discount for ultra-low emission vehicles.
CDC Comment – The doubling of the investment allowance is welcome but necessary as The Economist in 2013 regarded the UK performance on investment as ‘lower than Mali and Guatemala’. The focus on investment, exports and house-building will be seen as business-friendly and whilst positively received by the business community, the measures aimed at boosting competitiveness and productivity are in essence tinkering rather than radical.
Taxation
• Personal tax allowance to be raised to £10,500 next year.
• Transferable tax allowance for married couples to rise to £1,050.
• Increase of in the threshold for higher rate tax from £41450 to £41865 in April 2014 and by a further 1% to £42285 in 2015/16.
• Inheritance tax waived for emergency services personnel who ‘give their lives protecting us’.
• VAT waived on fuel for air ambulances and inshore rescue boats.
• Tax on homes owned through a company to be extended from residential properties worth more than £2million to those worth more than £500,000. Residential property worth more than £500,000 bought through corporate envelope to be liable to 15 per cent stamp duty.
CDC Comment – The rise in tax allowance was largely anticipated and welcome news to the low-paid but we see a missed opportunity with the (modest) change in the higher rate threshold. During Mr Osborne’s tenure, nearly 1.5m more people now pay tax at higher rates and this will not have gone unnoticed by the electorate. The modest expansion in the threshold seems parsimonious to us.
Welfare
• Welfare cap set at £119billion for 2015/16, rising to £127billion by 2018/19, with only the state pension and cyclical unemployment benefits excluded.
Savings
• Cash and stocks ISAs to be merged into single New ISA with annual tax-free savings limit of £15,000 from July 1st.
• New Pensioner Bond paying market leading rates to be available from January to all over 65s, with possible rates of 2.8 per cent for one-year bond and 4 per cent for three-year bond.
• 10p tax rate for savers scrapped.
• Cap on Premium Bonds to be lifted from £30,000 to £40,000 in June and £50,000 in 2015, and number of £1million winners to be doubled.
CDC Comment – measures such as increasing the ISA allowance to £15,000 per annum (from the current £11,520) are good news and send a clear message that the Conservatives are seeking the votes of savers. The balanced view is that implicit within these moves is an acknowledgment that interest and therefore savings rates will be pedestrian for some time yet.
Pensions
• Reform of taxation of defined contribution pensions to help 13million people from March 27th.
• Tax on cash taken out of pension pot on retirement to be reduced from 55 per cent to the clients marginal rate of tax.
• Changes to income requirements for flexible drawdown reduced from £20,000 to £12,000 per annum.
• All tax restrictions on pensioners’ access to their pension pots to be removed, ending the requirement to buy an annuity. £20million fund to develop new free right to advice for those retiring on defined contribution pensions.
• Change to the minor commutation rules allowing pension pots of up to £30,000 to be taken as a lump sum.
CDC Comment – this was undoubtedly the headline-grabber. Historically in the UK, people have tended to use their pension pots to buy an annuity, giving them a fixed income, but low interest rates have eroded the benefit in opting for an annuity. Under changes announced by the Chancellor, people will no longer be obliged to buy an annuity. Not surprisingly share prices of annuity providers were hit hard by the announcement but it will take time to see the long term impact and whether this really is the end for annuities. Overall the changes mean more ownership and a wider range of options at retirement.
Lifestyle
• Fuel duty rise planned for September ‘will not take place’.
• Duty on fixed odds betting terminals increased to 25 per cent, horse racing betting levy extended to offshore bookmakers and bingo duty halved to 10 per cent.
• Tobacco duty to rise by 2 per cent above inflation, and the escalator extended for the rest of the next Parliament.
• Alcohol duty escalator scrapped, so taxes will rise in line with inflation except for on whisky and other spirits, where it is frozen.
• Duty on ordinary cider frozen. Beer duty cut by 1p a pint.
• A £7billion package to cut energy bills includes £18 per ton cap on carbon price support rate from 2016 to the end of the decade, saving medium-sized manufacturer £50,000 and families £15 a year.
CDC Comment – more changes that are likely to be politically motivated but also helps to shore-up the UK brewing and distilling industries. The reduction in beer duty has been a continuing trend over the current parliament. We’ll drink to that, cheers !