Fixing the Foundations: an analysis of the 2016 Budget

The Chancellor’s focus on voter-friendly policies ahead of the EU Referendum

The Chancellor’s focus on voter-friendly policies ahead of the EU Referendum

Despite the fact that we are in the first year of a five-year parliament, this Budget had a pre-election feel, with several voter-friendly announcements. As with recent George Osborne Budgets, it was carefully politically positioned, in the knowledge that the Government’s political – and the Chancellor’s personal – future rests on the judgement of the voters in the EU referendum in just three months time.

Both the Chancellor and the Prime Minister are keen to ensure that the EU referendum does not lead to paralysis in Government. This is why the announcement on converting all schools to academies came in this Budget rather than in a separate speech from the Education Secretary. Combined with funding aimed at some of the worst performing schools this was intended to show that the Government remains focused on the Prime Minister’s opportunity agenda.

With the economic outlook turning against him, the Chancellor was keen to build his reputation as a trusted steward of the nation’s finances. The benefit of hindsight has led to many to question the wisdom of his decision to ease austerity in the summer Budget and his decision to spend the unexpected £27 billion windfall that forecasts seemed to give him in the Autumn Statement.

In a detailed opening, George Osborne focused on the downgrades in the OBR’s forecasts for future growth, which means that the economy will be 1.5 percent smaller than expected in 2020. He did this to highlight how events in the wider world have an impact on the UK’s economy, jobs, and, ultimately, on the amount of money that the Government has to spend on public services. As Osborne reminded the Commons, this means that the disruption caused by a vote to leave the EU would have a direct impact the UK’s economic prospects.

While the news that he has missed his self-imposed target, for debt to fall as a percentage of GDP, without much opprobrium from the markets or the public, his second fiscal target of achieving a surplus by 2019-20 is something that he can’t avoid.  This is due to his decision to place meeting this target into legislation. It is therefore no surprise that he re-emphasised the Government’s commitment to delivering a £10 billion surplus, and his decision to announce a further £3.5 billion of spending cuts was, therefore, essential for him to make progress in meeting this target.

One of the issues that particularly concerns the Chancellor is being able to reunite the Conservative family after the referendum. The announcement of further increases in the personal allowance and an increase in the threshold for higher rate tax were crowd-pleasing moves which will be popular with Conservative MPs and current and potential Conservative voters.

The Chancellor seemed keen to focus tax changes on those on lower incomes, who will be an important group of swing voters in the up-coming referendum. With this in mind, he announced an extension of the fuel duty freeze, even though falling oil prices would have given him the cover required to increase it. In doing so, he avoided confrontation with his own MPs and most importantly, The Sun.  Other crowd-pleasers include the freeze in beer and spirits, also designed to boost the UK’s alcoholic drinks industry.

An increasing hallmark of an Osborne Budget is the use of infrastructure and devolution announcements to provide some positive rhythm. And so, we heard good news for Crossrail 2 and rail links between Manchester and Leeds. In a series of devolution announcements, those that stood out particularly were a mayoral model for East Anglia and the devolution of some control over the justice system to Manchester, a radical move.

Business did well, with a reduction in corporation tax and a decision to increase the small business rates relief and reduce rate rises for all business. Osborne seems to have learnt from the backlash to his recent response to Google’s tax repayments and has focused tax rises on multinational companies paying little corporation tax in the UK, with radical changes to how losses can be offset against profits.

On a personal finance level, while the Government announced that they have shelved plans to reform the taxation of pensions, the announcement of a new lifetime ISA seems like an attempt to build up an alternative form of pension saving which will eventually eclipse personal pensions. This appears extremely generous to young savers but the growing shift from pensions to ISAs could be significant.
Elsewhere increases to the Insurance Premium tax will hit almost all householders by increasing the price of home, motor and travel insurance, but is a useful way for the Chancellor to increase tax take while hoping to avoid the blame.

The announcement few expected was the introduction of a sugar tax – something David Cameron had previously ruled out – to be introduced in two-year’s time. This is not a universally popular measure within the Conservative Party which tends to avoid such nanny state measures. But it is popular with celebrities like Jamie Oliver and will have moved the news coverage away from the rather negative numbers the Chancellor had to talk through at the start of his speech.

The immediate reaction to the Budget seems to be a vindication of the Chancellor’s approach.  Budgets do, however, have a tendency to unravel as the details become clear.  This was something that the Chancellor found to his cost in his ‘omnishambles’ Budget in 2012. He will be hoping that today’s speech won’t have that problem and instead boost his, and the Government’s reputation, in the months before June’s EU referendum.