Today George Osborne will deliver his eighth Budget. If you add in Autumn Statements and Spending Reviews, the current Chancellor has delivered thirteen fiscal events before he gets to his feet today. Horse racing enthusiasts would pour over these to assess the Chancellor’s fiscal form and make predictions on what we may expect to see.
The economic weather has taken a turn for the worse, with something of a cold wind blowing in from the east as the Chinese economy slows down. Economic forecasts have been downgraded at home and abroad. Furthermore, the going is a little bit less firm than it was even a few months ago as the Chancellor takes into account the mood of Tory backbenchers who are currently backing Brexit. As a result, George Osborne may keep his riding whip in check and not push the horse too hard.
Almost six years ago he introduced the ‘Triple-Lock’ guarantee for the state pension. Today he is in a straightjacket with three locks that will act to constrain him:
- The legislative requirement to have a fiscal surplus by 2019/20
- Fulfilling pledges within the Manifesto not to raise the three big revenue generators (VAT, income tax or NIC) and to increase the income tax threshold for low and middle earners (40% tax rate)
- His government is divided in relation to the EU referendum, so he is walking a bit of a fiscal tightrope
In the Autumn statement in November, forecasting changes by fiscal anoraks at the Office for Budget Responsibility gifted the Chancellor with a £27bn windfall, enabling Mr Osborne to perform a fiscal escapology act. This won’t be repeated today. Escaping from his self-imposed fiscal strait jacket – the fiscal charter – will prove tricky. The latter, enshrined in legislation, requires a budget surplus every year from 2020 “in normal times”; a feat the UK has only achieved eight times in the last 60 years. Achieving a surplus will be increasingly difficult in the face of an economic slowdown and ongoing financial market turbulence. Big tax rises or spending cuts, on top of existing plans, could be required at very short notice. Spending on public services other than health is set to reach its lowest level as a share of GDP since at least 1948/49. With limited scope for more spending cuts, taxation is likely to play the leading role in the austerity drive going forward.
A number of measures have already been flagged / pre-announced such as additional spending cuts (an extra 50p of cuts for every £100 of public spending), ‘Help to Save’ and infrastructure investments (railways). Some of the other big issues to feature today may include:
Corporation Tax – The Chancellor has been fond of cutting the headline rate of Corporation Tax. It’s worth remembering that when the Coalition government came to power, the headline rate of Corporation Tax was 28%. The Emergency Budget of June 2010 announced this would fall by 1 percentage point each year to 24% by 2014. Budget 2011 threw in an additional (and unexpected) 1% cut. Subsequent Budgets have lowered the headline rate to 20%. In July last year the Chancellor surprised yet again with a planned reduction to 19% by 2017 and to 18% in 2020. Businesses have and will benefit from the reductions to date and those planned. However, other taxes have been levied on businesses (e.g. the Apprenticeship Levy) which are a growing concern for businesses. Given the form the Chancellor has shown thus far; don’t be surprised if we see a further reduction in the headline rate of Corporation Tax below 18%. However, this is likely to be offset by a scale back of reliefs and / or additional corporate tax rises elsewhere.
Indirect taxes and duties – Osborne has ruled out raising tax revenue from the big ticket revenue generators. Given the need to raise revenue this means other taxes, falling outside of any manifesto pledges, will have to do the heavy lifting. Last July’s Budget was a case in point. It announced a hike in Insurance Premium Tax (IPT) from 6% to 9.5%, as of 1 November 2015. This rate still compares favourably with many other EU countries. Don’t rule out another hike (to say 12%?). The attraction with a tax rise such as this is the Chancellor is one step removed from the price rise that consumers will experience. Therefore he doesn’t get the blame for it directly, unlike other taxes.
Sin Taxes – inflation busting duty increases can be expected on tobacco, gambling and alcohol. You may recall that Budget 2015 last March cut the duty on beer and spirits. That was just before the General Election in May. These taxes normally only get changed in the March budgets and not in Autumn Statements. Therefore given the fiscal challenges facing Mr Osborne big duty hikes may just be what the Chancellor orders.
Fuel duty – This is arguably today’s favourite. Over the years the Chancellor has been a friend of the petrol forecourt as he regular cancelled planned fuel duty increases and abolished the fuel duty escalator from the previous government. The latter meant duty would rise above inflation every year. Last March he once again cancelled a planned fuel duty increase for September 2015 and claimed “It’s the longest duty freeze in over twenty years”. The fall in the oil price (& petrol prices) since November offers the Chancellor an opportunity to increase duty at a time of low prices. Petrol and diesel prices are lower now than at any time since George Osborne has been Chancellor. Indeed, they are approaching a 7-year low and have fallen by 20-25% since mid-2014. We expect the Chancellor to exploit the current low price with a fuel duty rise.
Land Value Tax – The Chancellor has demonstrated a penchant for a raft of housing initiatives e.g. Help to Buy and increasing Stamp Duty Land Tax. Most of the recent housing policy changes have focused on subsidising demand, which has the effect of pushing up prices. The government knows that it needs to move from Help to Buy to Help to Build. That is, it needs to stimulate the supply of houses, not mainly the demand for them. The rate of house building still lags way behind what is required. The Chancellor has the opportunity to design a win-win incentive to meet the goals of building more houses and generating more revenue by introducing a “Land Value Tax”. That’s a tax that landowners would pay on the value of their land regardless of whether the land has been built on. The tax could also rise over time to discourage speculative land banking. It would give landowners an incentive to build on their land or to sell it, thereby increasing the supply of land. We may also see additional incentives to encourage public bodies to dispose of land and / or speed up the planning process.
Pensions – The Chancellor has already been quite radical with a number of pension changes to date. These have been and are always significant. However, they are not media friendly and therefore don’t feature on the front page of the tabloids and instead are normally digested in the weekend broadsheets long after Budget day has passed. The Chancellor has already ruled out radical changes such as proceeding with his “Pensions ISA” idea. This would have seen people lose tax relief on contributions but receive tax relief on income after retirement. A flat tax rate for relief on contributions also seems to be ruled out (for now). Therefore the 20%, 40% and 45% rates of relief are likely to still apply. Ruling out these changes doesn’t mean the Chancellor will avoid tinkering with pensions in other ways. For example, the lifetime allowance could be reduced further below the planned £1 million thus further reducing the amount of relief people will receive if not the rate.
Sugar Tax – There has been much debate about this topic in recent months: would a sugar tax help tackle obesity and make us all healthier? Like LVT and Fuel Duty, it has the virtue to the government of raising revenue. It can also be presented as “doing the right thing for the nation’s health”. Introducing a sugar tax is seen as a wild card for today. Such a move would guarantee front page headlines in the pun-friendly tabloids. The Chancellor discovered his sweet tooth for taxation in the Autumn Statement last year. Imposing a sugar tax would be further evidence of this.
Overall, given the context today in relation to the public finances, like at Cheltenham, there will be more winners than losers (though the Chancellor will of course want to focus more on the former). Starter’s orders!