Beyond the headlines and controversy, Eurfyl ap Gwilym finds the 2016 UK Budget full of 2nd order financial measures and fudges.
It is often claimed that a week is a long time in politics: in the case of the 2016 UK Budget three days proved to be a long time for the Chancellor with some of the most telling criticism coming from within his own party. The principal features of the 2016 UK Budget were anticipated well before the Chancellor stood up to deliver his speech last Wednesday: much has changed since the heady days of last November when he delivered his upbeat Autumn Statement. It has been clear for some time that economic growth would be lower than the 2.4 per cent forecast just four months ago and it has now been downgraded for future years by the Office for Budget Responsibility (OBR) including a reduction to 2.0 per cent for this year. These downgrades mean that tax revenues will now be lower than planned and the OBR has increased the forecast deficit for the next three years by £36.4bn. To be fair to the Chancellor many of the factors driving down the growth forecast are outside his control: the slowing down of the Chinese economy; the continuing fragility of the Eurozone; and the uncertainty regarding the future path of the US economy. It is these very uncertainties that made the commitment last year by the Chancellor to achieve a budget surplus by the end of this parliamentary term so misguided. Economic policy should be driven by the economic cycle rather than the political one. Given his self-imposed constraint the Chancellor found himself hemmed in as he finalised his budget with little room for manoeuvre apart from announcing what were, in the main, second order financial measures and fudges. The self-imposed target of producing a budget surplus by 2019-20 has also led to a massaging of spending plans to achieve a surplus with unspecified efficiency savings of £3.5bn in 2019-20. Capital investment planned for 2019-20 has now been brought forward in order to help generate a surplus in 2019-20. Public investment in the UK will fall to 1.4 per cent of GDP in 2019-20 compared with the OECD’s recommended level of 3.4 per cent. Such investment will then bounce back to 1.9 per cent of GDP in the following year. The timing of payment of corporation taxes is also being brought forward for a one-off gain in 2019-20. Surely it is no coincidence that so many events take place in the key year of 2019-20: the year when a budget surplus is meant to be achieved?
There is another concern regarding the cut in public investment plans. One of the principal reasons for the OBR downgrading growth forecasts was the poor outlook for improvements in productivity. Given that productivity performance is key to international competitiveness and higher wage levels the lack of public investment will blight the outlook for the future generations about which the Chancellor claims to be so concerned. Now is the time to invest and an additional 1 per cent of GDP – equivalent to £19bn per year at the UK level and approaching £1bn for Wales – would be a material step in the right direction. Currently the UK Government can borrow over ten years at an historically low rate of 1.5% which in real terms is close to zero. For those who object that borrowing to invest could generate problems in the capital markets it should be noted that Pimco, one of the world’s largest investors in government bonds, suggested last week that the UK had been subject to enough austerity.
Much of the public’s interest in the budget is centred on taxation and as ever the devil is in the detail but it should be noted that under the plans announced in the budget the overall tax burden will increase to 37.5 per cent of GDP by 2019-20. In terms of personal taxation there were few surprises. The threshold at which income tax starts to be paid and the threshold at which the higher rate is paid were lifted. Both these measures were consistent with declared medium term plans to raise the two thresholds to £12,500 and £50,000, respectively. A criticism of this plan is that it will not help those on the lowest pay because their pay is already below the threshold at which income tax becomes payable. Arguably a better approach would be to raise the threshold at which National Insurance Contributions (NICs) become payable: an added advantage of this approach is that NICs are only payable on earned income and those with incomes derived from pensions and dividends would not gain from the increased thresholds. A number of modest measures were announced to encourage savings including raising the annual ISA allowance to £20,000 in 2017 and cutting the rates of capital gains tax. Such measures would be particularly welcome both by Conservative backbenchers and the better off who are in a position to save but will be of scant help to poorer members of society.
On the business front the headline rate of corporation tax is to continue its downward trend and will be 17 per cent by 2020. While the reduction in the headline rate of corporation tax will catch the eye the overall tax burden on corporates will increase due to changes in tax allowances including the treatment of interest and an additional £9bn will be brought in over the next five years: this dwarfs the savings from the 1 per cent cut in the rate of corporation tax which will save corporates £945 million by 2020-21. Business rates in England are to be cut for many small and medium sized businesses although the measures are not as generous as those in Scotland. No doubt all political parties fighting the National Assembly elections will be proposing cuts to business rates.
While the majority of people will welcome any cuts in personal taxation the other side of that coin – reductions in public spending – may not be so welcome. Within two days of the budget being announced it became apparent that many question whether or not there should be cuts in income tax for the higher paid and those fortunate enough to own assets such as shares which are subject to capital gains tax if such measures mean cutting spending on welfare programmes such as the Personal Independence Payment (PIP). This is not the first time that the Chancellor has displayed a ‘tin ear’ when it comes to welfare programmes and his retreat last November with respect to Tax Credits will almost certainly be followed now by a retreat on his PIP plans.
Plaid Cymru will be pleased to see that after advocating for a number of years a tax on sugary drinks the Chancellor has accepted the arguments and will aim to raise £520 million a year from such a tax and in the case of England will use the proceeds to fund school sports: an interesting example of hypothecation – a practice which was until recently strenuously opposed by the Treasury. The sugar tax has the virtue both of raising revenue and being a health measure.
What of Wales? In financial terms the Welsh Government will see an increase of £22m in capital spending and £358m in current spending over the next four years. To put this in context the Wales Departmental Expenditure Limit this year is £14.4bn thus the increases are not material. In the case of specific initiatives there were a number included but in most cases crucial detail was absent. There is a recommitment to the Cardiff City deal although to put this in perspective the Treasury is committing to a modest £500 million over twenty years. The possibility of a City Deal for Swansea was announced. The possibility of establishing an enterprise zone in Port Talbot was floated as was the need to enable north Wales to take advantage of the ‘Northern Powerhouse’ in North West England. All these measures are to be welcomed but given the poor record of delivery of publicly funded programmes in Wales many will view the announcements with a degree of scepticism. The Welsh Government’s poor record of managing EU regional aid funding will, hopefully, have led to a rigorous appraisal of how not to dissipate such funding in the future: time will tell. A popular and eye catching measure which should be delivered is the plan to halve the tolls on the Severn Crossings by 2018 although this commitment is qualified as being subject ‘to public consultation.’ The people of Wales should take the Chancellor at his word and press during the consultation for full abolition of the tolls.
Over the coming days more budget details will emerge and there will be an opportunity to assess the budget more completely but the initial reaction is that the budget measures are far too modest to counter the formidable economic challenges facing both Wales and the UK. The balance of spending cuts and tax cuts is wrongly skewed in favour of the better off at a time when we are all meant to be in it together. Given the weak economic position of Wales the tax cutting measures will be of less value here and the spending cuts will bear down more heavily.
Given his self-imposed constraint aimed at eliminating the budget deficit by 2019-20 the Chancellor will continue to be buffeted by small changes in the economic forecasts over the coming years and will continue to resort to second order measures and fiscal manoeuvring to avoid failing what is, in economic terms, a nonsensical goal of generating a budget surplus by a specific date irrespective of what is happening in the global economy. In his first five years as Chancellor, George Osborne demonstrated commendable flexibility when the economy slowed down and instead of raising taxes or cutting spending further he quietly abandoned his target of eliminating the deficit within five years. Unfortunately the Chancellor has now painted himself into a corner and could become the prisoner of events many of which are outside his control unless he is prepared to abandon the tenets of his so-called long term economic plan which have proved to be no more than a chimera.