On March 19 this year, George Osborne, the Chancellor of the Exchequer, gave his Budget where he set out the coalitions’ plans for the coming fiscal year. Commentators have christened the budget in a variety of ways – from the “Beer, Bingo and Lamborghinis budget” to the budget that woos the “silver-haired and savers.” Understandably there will be some winners and some losers.
The main focal point of the budget is fact it’s the largest overhaul for pensions in decades. Retirees are now to be given more freedom to tinker with their pension pot and are to be spared the extremely unpopular annuity pension. Pensions Minister Steve Webb claimed that pensioners should be allowed to “spend all their pensions on Lamborghinis,” if they so wish. Moreover, retirees will be offered a new “Pensioner bond” which will pay up to 4% per annum, up from the current best 2.25%. Bingo players should also benefit, from a halving in duty to 10%.
Secondly, Mr Osborne’s intention has been to help savers, who are to be given extensions to their current tax-free personal allowance making most taxpayers £805 better off by 2015-2016.
Lastly the budget has also been self-proclaimed as a “budget for business” by the coalition. Indeed the proposed reforms look promising. Corporation tax will be reduced to the joint lowest in the G20 at 20% so UK export finance lending is to double to £3 billion. This is a bold move by Osborne, one that recognises the need for international business competitiveness.
The losers of the budget are wide ranging, as always, they begin with the very rich and the middle class. Stamp duty will increase on homes worth more than £500,000 to 15%. Mr Osborne has stuck by his guns and not increased the starting level of the 40% tax rate significantly. It has been increased to £41,865 from £41,450, which means millions of people remain and will be dragged into the band as salaries rise.
All of these announcements wiped off more than £3bn of the shares of insurances companies.
All good news?
The budget was clearly populist in many regards with no clear intent, intending to shore up key sectors of the electorate. What’s more is the economy is expected to grow by 2.7% the fastest of any major economy. This, coupled with falling unemployment and a rise in real incomes all seems well and good.
However the job is far from done and structural problems continue to persist. It should be noted that higher GDP growth this year has come at the expense of downward revisions to growth by 0.1% and 0.2% respectively for 2017 and 2018. This implies that our economy is narrowing the output gap by using up resources in the economy (falling unemployment). Yet output per worker or productivity (which is the real indicator of a healthy economy) has been feeble, falling since 2007.
This is a recipe for disaster. Indeed GDP will surpass pre-recession levels yet real incomes remain 5.5% below. The Office for Budget Responsibility warned that public finances have also deteriorated, household debt has began its ascent, nearing pre-crisis levels.
The budgets political rhetoric remains nothing more than a facade, merely concealing the true health of the economy. It may be of short-term value to the Coalition but it is not enough for longer-term success for the UK. Shadow Chancellor Ed Balls was as stunned as many are of this budget, by labeling it “underwhelming,” arguing that no provision has been made “to help families who are worse off than they were five years ago” and no actions have been taken to create “jobs for young people, [and] a proper investment bank.”
What must be done?
In order to reduce the budget deficit and to increase real incomes in a sustainable manner requires long term infrastructure initiatives like HS2 and a new London airport. This will improve both our productivity and create much needed jobs.
Moreover, skills training and robust higher education needs to be provided to provide the necessary skills to get the UK back to where it belongs: the top end of the labour productivity rankings.
Overall, this budget hasn’t exactly been the most ambitious to date. One thing is for sure, business and consumer confidence is high, but this cyclical growth must not be over estimated, structural reforms are still needed. Things are beginning to sweeten for the Coalition but we have to wait and see how long this can last, especially with an impending deflationary crisis in the European Union and slowing Chinese growth. Is Britain ready for another exogenous shock? Mr Osborne and his budget seem to have overlooked this.
Also, the budget mentioned a new 12-sided one pound coin to be introduced from 2017 – that could be intersting!