Today’s Budget announcement was part of a stimulus ‘double-bill’. The Bank of England unveiled a massive impetus this morning, with a 50-basis point cut in the interest rate and more importantly a package of targeted measures to guarantee credit flow to businesses given the looming threat of Coronavirus.
This afternoon’s instalment in the form of Rishi Sunak’s debut Budget complemented this by acting to ease cash flow concerns for households and businesses. In addition, the public spending taps have been turned on to support public services and to enable investment in infrastructure – in relation to everything from climate change to transport and housing. One thing that was missing however was any meaningful increase in taxes. Normal Budgets are generally a careful balancing act of revenue-raising and spending commitments, but not today, which was a rather one-sided affair in that it was overwhelming focused on spending.
Where is all of this money coming from if not from tax rises? The answer is borrowing. The UK is set to borrow £300billion over the next five years.
The limited tax increases there were included the already announced cancelling of the corporation tax reduction, the scaling back of red diesel duty relief, and reducing the life-time limit on entrepreneur’s relief in relation to capital gains tax. We also heard that there will be a plastic tax introduced within two years. Notably, fuel and alcohol duty increases were absent. But remember that another Budget is due in the Autumn; Coronavirus has arguably deferred many of the unpopular tax rises which will now likely be imposed when we and the economy are feeling better.
One thing that was expected but wasn’t actually announced by the Chancellor can be seen in the detail of the Budget documents. It is an income tax rise in all but name. In the next financial year the income tax thresholds will be frozen, meaning that more people will fall into higher tax brackets.
Economic growth for 2020 is expected to be a lackluster 1.1 percent, revised down from 1.4 percent last March. Almost half of this 1.1. percent is dependent on today’s fiscal stimulus. This forecast though didn’t take into account the recent escalation of the Coronavirus and the reality is that it will be much lower. The Northern Ireland economy appeared to be in recession even before the pandemic, and we now expect a contraction for 2020 as a whole.
Some of the things announced to help protect households and consumers in light of the Coronavirus uncertainty include adjustments to statutory sick pay (SSP), and the planned increase in the National Insurance contribution threshold from £8,632 to £9,500.
On the business front, the change in statutory sick pay will be welcomed, and for firms with fewer than 250 employees, SSP of up to 14 days will be refunded. Other measures of support for companies include government guarantees on business loans and further enhancement of R&D tax credits, as well as a range of business rates reliefs for those at the sharp end of the COVID-19 situation, such as cinemas and music venues.
The rates relief though applies to England and not Northern Ireland. Any business rates relief for local firms will have to be introduced via Stormont’s budget, which is planned for 30th March.
Northern Ireland though will see its Block Grant increase by £210m as a result of today’s UK Budget. The announcement that a Treasury office will be set up in Northern Ireland is also an economic boost as it will see Whitehall’s most influential department become more plugged into what is going on in the local economy. In addition, £126million of funding was announced for a Mid, South and West of Northern Ireland Growth Deal and £36m was announced for a growth deal in Causeway Coast and Glens. Local farmers will also have breathed a sigh of relief that they will continue to receive relief on red diesel.
Given that Northern Ireland has the highest proportion of low-paid jobs of any UK region, one measure that will disproportionately benefit Northern Ireland is the increase in the National Living Wage target from 60 percent of median earnings to two-thirds by 2024. This will take the projected hourly rate to over £10.50 per hour.
One thing that wasn’t mentioned in today’s Budget is Air Passenger Duty (APD). This was expected though, as APD is under review with the government only beginning to consult on the issue at present. Some kind of announcement is expected later this year, perhaps in the Autumn Budget.
Given the near-term challenges facing the health of the UK and its economy, a surge in borrowing and spending is certainly the right prescription for now. But beyond that, taxing times certainly lie ahead.
PODCAST: Chief Economist Richard Ramsey outlines what you should know from today’s #Budget2020 (in full).