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Budget 2016

March 24th, 2016
Budget 2016 George Osborne’s eighth Budget as Chancellor of the Exchequer proved something of a mixed bag, in which tax breaks for small businesses and savers appeared alongside a downbeat assessment of the global economy and the UK’s financial position. Although the UK’s deficit is still on target to be eradicated by 2019/20, the journey to surplus appears to have become rather more challenging. Recent calculations suggest that the Chancellor will only remain on course to achieve an eventual budget surplus by making additional cuts to public spending worth £3.5 billion. Looking ahead, he highlighted a “dangerous cocktail of risks” – turbulent financial markets, low productivity growth, and a weak outlook for the global economy – and warned that the UK should “act now so we don’t pay later”.
  • Productivity growth is curbing economic expansion According to the Office for Budget Responsibility (OBR) , prospects for the global economy have deteriorated “materially”, and the UK is not immune to slowdowns or shocks. The OBR expects the UK’s economy to grow by 2% this year, compared with its previous prediction of 2.4% . The outlook has been dampened by a decline in productivity growth. The OBR cut its forecast for growth in 2017 from 2.5% to 2.2%, and from 2.4% to 2.1% in 2018.
  • These forecasts for economic growth were calculated on the basis that the UK will remain in the European Union (EU). The Chancellor emphasised the OBR’s view that the UK will be “stronger, safer and better off” if it remains within the EU, warning that a Brexit could result in “negative implications for activity via business and consumer confidence, and might result in greater volatility in financial and other asset markets”.
  • Back to black by 2020?
  • Although debt has fallen by £9 billion in cash terms, the nominal size of the UK economy has also fallen . Therefore, debt as a percentage of GDP remains ahead of target and is expected to be higher than previously predicted. Debt as a share of GDP is now tipped to reach 82.6% in 2016/17, 81.3% in 2017/18, 79.9% in 2018/19, 77.2% in 2019/20, and 74.7% in 2020/21.
  • The OBR revised up its predictions for borrowing to £55.5 billion in 2016/17, £38.8 billion in 2017/18, and £21.4 billion in 2018/19, after which the UK is expected to move into surplus. The Chancellor announced further public spending cuts that will total £3.5 billion by 2020. These are expected to be achieved through an “additional drive for efficiency and value for money” in Whitehall.
 
  • Small businesses to benefit
  • The Budget proved something of a mixed blessing for UK businesses. The headline rate of corporation tax will be reduced from its current level of 20% to 17% by 2020. Smaller firms received good news on business rates: from April 2017, 250,000 smaller businesses will have their rates cut, while 600,000 small companies will pay no rates at all.
  • However, the Budget provided a few stings for larger UK companies, particularly for drinks manufacturers and insurers. The Chancellor increased the standard rate of insurance premium tax from 9.5% to 10%, and unveiled a levy on the total sugar content of soft drinks that is expected to raise £520 million from April 2018. He also tightened up tax loopholes used by some multinational companies when carrying forward losses or deducting interest. Elsewhere, in a bid to support the struggling energy sector, he halved the supplementary charge for oil and gas producers from 20% to 10%, and effectively scrapped the Petroleum Revenue Tax.
  • Support for savers
  • Savers received good news as the Chancellor announced an increase in the annual Individual Savings Account (ISA) allowance from £15,240 in April 2016 to £20,000 from April 2017. He also revealed the introduction of a new “Lifetime ISA” specifically aimed at those aged below 40. Individuals can save up to £4,000 each year towards a deposit on their first home or their retirement and, for every pound they save, the government will contribute a bonus of 25%.
  • Lower-paid workers are also set to benefit from a new “Help to Save” scheme that will provide a 50% government top-up on up to £50-worth of monthly savings. People can save up to £2,400, receiving a maximum bonus of £1,200.
 
  • Personal tax breaks
  • The Chancellor increased the threshold at which individuals will begin paying income tax at 40% from £42,385 to £45,000 from April 2017. He also raised the tax-free personal allowance from £11,000 in April 2016 to £11,500 in April 2017. Capital gains tax (CGT) also came under scrutiny: the higher rate of CGT will be cut from 28% to 20% from April 2016, and the basic rate will fall from 18% to 10%.
  • Reaction: productivity growth is crucial
  • The Confederation of British Industry (CBI) welcomed the Budget as “a stable Budget for business facing stormy waters” but expressed disappointment that, in an environment of weak productivity growth, there were “no further measures to support innovation and R&D”. Meanwhile, the British Chambers of Commerce (BCC) welcomed the Budget as “steady (and) workmanlike”, but urged the Chancellor to tackle the “deep-rooted productivity problems in the UK economy

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