The first only-Conservative budget since 1996 was eagerly awaited by some and dreaded by others. Freed from the restraining hands of the Lib Dems he was free to produce the budget he wanted. In his sights were benefits, tax credits and student grants, while he also indicated a slightly less draconian approach to austerity.
Good news on the economy
From the outset, he was keen to promote the government’s economic credentials. Britain was growing faster than any other major advanced economy at 2.6% in 2014. Over the next few years, GDP would be 2.5% in 2015, 2.3% in 2016 and 2.4% in 2019. Employment is on the up and 1,000 extra jobs have been created every day.
The work to cut the deficit is to continue albeit at a slightly slower rate than before. The much longed-for surplus has been postponed by a year until 2019-20. Borrowing is expected to fall from £69.5bn this year to £43.1bn, £24.3bn and £6bn over the following few years culminating in a £10bn surplus in 2019/20. Debt, as a share of GDP, is at 80.4% this year and will fall to 79.8%, 77.8%, 74.8%, before it reaches 71.6% in 2019/20.
In taking a slightly gentler approach to balancing the books, the government will be spending more than was previously planned. According to the Office of Budget Responsibility, it will be spending £83bn more than announced in the March budget. The squeeze on public sector spending will end a year earlier.
If the pace of austerity is a little slower, benefits were still firmly on the chopping block. Working age benefits have been frozen for four years including tax credits. Child tax credits will be restricted to two children after April 2017. The level of tax credit withdrawal will be reduced from £6,420 to £3,850. Young people will be forced to either earn or learn, meaning they will no longer be automatically entitled to housing benefit.
In pensions, a new green paper published by the government opens the way to a significant change in the way we save for pensions. If the changes, which will be open to a public consultation period are adopted, pensions will become more like ISAs with people able to earn a tax-free sum that is topped up by the government. Meanwhile, the triple lock on the state pension will be maintained and tax relief on pension earnings restricted to £10,000 a year for those earning in excess of £150,000 per year.
Tax and pay
As expected, the rate at which earners enter income tax has been increased again. That pops up to £11,000 as the government edges closer to its target of £12,000. The rate for the 40p rate rose from £42,385 to 43,000. As predicted, inheritance tax has received another cut. The threshold increases to £1million from 2017 with people being able to transfer an extra £175,000 “family home allowance” to their children tax-free on their death.
However, the headline grabber was the theft of an old Labour policy. The minimum wage would be replaced which something labelled as a National Living Wage. This will start at £7.20 an hour in April 2016 and will rise to £9 an hour by 2020, replacing the £6.50 per hour minimum wage. However, the levels more or less match predictions for the minimum wage over the same period. Critics were quick to argue that they had done little more than rebrand the existing system.
Osbourne spoke at length in support of non-dom tax arrangements, which he said were crucial to encouraging investment in the country, but he accepted the system needed to change and abolished permanent non-dom status. Anyone who has been living in the country for 15 of the last 20 years will be forced to pay the same amount of tax as everyone else.
Tax avoidance will also be targeted, with £750 million going to HMRC to target tax avoidance and evasion. With users of complex evasion schemes being named and shamed, he hopes to raise an estimated £7.2bn.
There were a number of measures designed to appeal to businesses. Corporation tax is to come down from 20% to 19% in 2017 and 18% in 2020. The bank levy, which has sparked wails of protest from the City, will be decreased to 0.21%, to 0.18%, reducing to 0.1% in 2021.
Small businesses had reason for cheer with an increase in the level of national insurance provisions. From 2016 this will rise by 50% to £3,000. At the same time, though, he made moves to clamp down on attempts by businesses to exploit loopholes such as setting up separate companies for each of their employees to reduce National Insurance contributions.
There are more moves to spread the wealth a little wider with attempts to spark faster growth away from the capital. Dusting down the Northern Powerhouse, he spoke of more powers being given to Greater Manchester and an Oyster card style travel system across the region. However, moves to electrify parts of the rail network in Northern England have been postponed, giving Harriet Harman a chance to lay into the plan in her response. “You can’t build a productive economy on a political slogan,” she said.
Any other business
This was a budget packed with policies. Among the other announcements was a restriction of Mortgage interest relief for buy-to-let mortgages to the rate of income tax. The rent a room relief is to be extended to £7,500 and the NHS will receive £8bn of extra funding. There was also a slight surprise in a commitment to meet NATO targets of spending 2% of GDP on defence. The UK had been widely expected to fall below this figure. Maintaining the 2% figure will require significant reinvestment into the armed forces.
Students suffered a hit with the removal of maintenance grants to be replaced by loans. However, to make up the shortfall the size of the loans is to be increased to £8,200. This will be repayable once the student’s earnings exceed £20,000.
This was a budget the budget most people expected. For the Conservatives it has intended to place them as the party of fiscal responsibility. Osbourne said he hoped to set a standard that would require all future Chancellors to only spend as much as they brought in. Critics, meanwhile point to the cut in housing benefits to the young, the removal of maintenance grants, benefits caps, and tax credit cuts, as well as the absence of green issues.