George Osborne will deliver the second Budget of 2015 on Wednesday, July 8th, just two months – almost to the day – after the Conservatives secured an outright majority in the General Election.
With all the pundits predicting a hung parliament, the Conservatives secured an overall majority of 12; not huge but – in the short term at least – workable. And the Chancellor seems keen to press on with his economic reforms, perhaps before the inevitable storms over the in/out referendum on the EU blow the Government off course.
George Osborne announced the new Budget in mid-May, saying that he wanted to “deliver on the commitments we have made to working people.” There would, he said, “be a laser-like focus on raising productivity and living standards.”
I think we can expect ‘increases in UK productivity’ to be a theme running through Osborne’s pronouncements: he is well aware that the UK lags behind countries like Germany and the USA in this respect.
Writing in a UK newspaper, the Chancellor gave an early indication of his thinking, although he consistently refused to be drawn on where the much-discussed £12bn of welfare savings would come from. He would, he wrote, “make the welfare system fair for those who pay for it.”
There would also be more funding for the NHS, savings across Whitehall and a crackdown on tax avoidance and evasion. There was also a commitment to create three million more apprenticeships: the Budget would deliver stability and “move Britain towards full employment.”
As you might expect, the nation’s economic commentators weren’t quite as enthusiastic as the Chancellor and, far from ‘stability,’ the word ‘emergency’ was used in several articles. Labour broke off from finding a new leader to fire the predictable broadside and Nicola Sturgeon gave the ritual condemnation on behalf of the 56 newly-elected SNP MPs.
The Economic Background
A month on from the Chancellor’s announcement the rhetoric has settled down, there have been more policy announcements and we perhaps have a clearer idea of what we can expect on July 8th. First, though, let’s try and put the UK’s current economic situation into some sort of context: after all, as George Osborne has often admitted, the UK cannot be immune to what’s happening in the wider world.
The outlook for the UK economy is reasonably good. The CBI have downgraded their growth forecasts for the year slightly, but are still forecasting growth of 2.4% for this year and 2.5% for next year. Unemployment continues to fall and welfare spending is at a 25 year low. Inflation turned negative in April, but Bank of England Governor, Mark Carney, is not worried about deflation, expecting inflation to start moving towards the 2% target level by the end of the year.
In Europe, Greece continues to teeter on the brink. I started these notes on Friday June 12th, at which point negotiations with the IMF had broken down and EU officials were starting to plan for a Greek default. It appears that further talks on Sunday collapsed after less than an hour – but don’t bet against yet another last minute compromise. No matter what happens with Greece, though, there are still problems in many European economies and worrying signs that the German taxpayer may not pick up the bill indefinitely.
Further afield, the US economy added 280,000 jobs in May – well ahead of expectations – and whilst the Chinese economy shows worrying signs of a slowdown, the Government there seems ready to take whatever action is needed to continue stimulating the economy.
What can we expect from the Chancellor?
So much for the background: what is George Osborne likely to deliver on July 8th?
The headline announcement to date – which we are likely to see confirmed in the Budget speech – is what’s been dubbed the ‘Micawber rule.’ Annual income twenty pounds, wrote Charles Dickens, annual expenditure nineteen [pounds], nineteen [shillings] and six [pence], result happiness. The figures are slightly larger, but it seems the Chancellor is determined that neither he nor his successors will spend the equivalent of twenty pounds, ought and six and plunge the country into misery.
Where other Chancellors have had principles, guidelines and – in the last parliament – a ‘golden rule,’ George Osborne likes legislation. So the Micawber rule will become law, with a commitment that governments must operate a Budget surplus in ‘normal times,’ (with ‘normal times’ defined by the Office for Budget Responsibility.)
The Chancellor made this announcement in his annual Mansion House speech, when he also confirmed that the Government would sell its remaining stake in the Royal Bank of Scotland, possibly incurring a £7bn loss. In the Budget, we can expect the Chancellor to confirm that the Government will also raise £1.5bn by selling its remaining share of Royal Mail. There will also be a further £3bn of savings from another raid on Whitehall departments: the Budget speech should then see confirmation of where the Government will further cut welfare spending.
The Queen’s Speech has already seen a commitment from the Government to introduce a law preventing rises in tax, VAT and national insurance during the life of this parliament. The government is effectively betting on the tax take increasing by more people being in work: this – combined with the welfare cuts – is what the Chancellor expects to eventually wipe out the Budget deficit.
Apprenticeships are one key area that the Chancellor will target. As the election manifesto stated, ‘we have already delivered 2.2m new apprenticeships over the last five years. Over the next five we will deliver three million more and ensure they deliver the skills employers need.’ He is likely to confirm this commitment in the Budget speech, setting a target that commentators have described as “difficult but not impossible.”
We’re certain to see action on tax, with a commitment to continue raising the personal allowance – I’d also be surprised if we didn’t see a commitment to raise the starting point for 40% tax to £50,000.
The Chancellor might also give details of how he plans to raise the inheritance tax threshold on family homes to £1m. The commitment is to do this by 2017, so he doesn’t have long.
One thing we may see is action to close the ‘salary sacrifice loophole.’ This is where employers allow staff to take a supposed ‘pay cut,’ with the money instead being put towards pension contributions or other benefits like childcare. On the one hand, the Chancellor will want to be seen as pro-business: on the other, the Government is losing an estimated £5bn a year in National Insurance payments due to this practice. Salary sacrifice could easily go under a pledge to make the pensions and taxation system ‘simpler and fairer.’
Finally, expect to see a bold, confident Chancellor when he stands up to speak on July 8th. Many pundits give much of the credit for the Conservative victory to the Chancellor – and with David Cameron already stating that he won’t fight another General Election, George Osborne is very much a contender to take over. We’ll see the Chancellor setting ambitious targets on July 8th – and he’ll be going all out to deliver.
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