Thursday, 20 March 2014

Budget 2014

Yesterday (19-Mar-1014) George Osborne presented his second last budget of this parliament; the last one that will actually have much effect on the country before the next general election in May 2015.

In it he outlined plans to spend £732bn in the coming year compared to £720bn last year, of which he proposes to borrow £84bn compared with £108bn last year. So he is growing spending at about 1.7% compared to CPI inflation of 1.9% - thus this is a slightly deflationary budget, but he has held a lot of public pay rises down at 1% which will account for most of the hardship.

For the record the spending is as follows:

Department             2013/14     2014/15    Change

Benefits/pensions      £220 bn     £222 bn    +0.9%
NHS                    £137 bn     £140 bn    +2.2%
Education              £ 97 bn     £ 98 bn    +0.1%
Other                  £ 53 bn     £ 53 bn     0.0%
Debt interest          £ 51 bn     £ 53 bn    +3.9%
Defence                £ 40 bn     £ 38 bn    -5.0%
Police/justice         £ 31 bn     £ 32 bn    +0.3%
Social services        £ 31 bn     £ 31 bn     0.0%
Housing/environment    £ 23 bn     £ 25 bn    +8.7%
Transport              £ 21 bn     £ 23 bn    +9.5%
Industry/agriculture   £ 16 bn     £ 17 bn    +6.3%

The item that stands out is defence which has actually gone down in real terms. This is the saving from pulling out of Afghanistan.

The big winners are transport (HST2) and housing (a new city is to be built, called Ebbsfleet.)

It should not pass unremarked that debt interest payments are now (joint with "other") the 4th largest spending item.

The chancellor was able to report some fairly good economic news: GDP is ahead of forecast, and there are new forecasts for the years to come which are all ahead of previous forecasts. Borrowing is down and forecast to be lower than previously forecast. The new expectation is that the UK will stop borrowing and increasing its national debt in 2019/20, ie the end of the next parliament and only five years after Osborne's original forecast in 2010. But of course this is only a forecast - and all previous forecasts have been wrong.

George then took time out to inform us that a new pound coin is coming in 2017. This one will be twelve-sided and bi-metallic to fox those pesky forgers who have apparently replaced 1 in 30 of the pound coins in circulation with fakes.

There is a little subtlety to this. The original £1 coin was surprisingly similar in size and shape to the one euro coin and pretty clearly was gearing the UK up for entry into EMU. The new coin is a complete divergence so it seems Whitehall has decided the UK is never going into the euro.

There have been some objections to the coin having 12 sides because having an even number of sides (and not even rounded sides) makes it more likely to get stuck in slots. The 50p and 20p both have seven sides to avoid this problem.

It's a pound, but not as we know it.

The chancellor then promised us there would be no pre-election give-aways in this budget, before proceeding to announce the pre-election give-aways.

Fuel duty frozen; cider duty frozen; 1p off a pint of beer; spirits duty frozen; air passenger duty reduced for long haul (and private jets taxed for the first time!) Help-to-buy extended to 2020 and a shed load of cash handed over to various causes including a few million to mend potholes.

Corporation tax was reduced to 21%, with a view to getting it down to 20% next year. All electricity bills to be cut by a reduction on carbon tax. Bingo duty halved. (I didn't even realise there was a tax on bingo!)

The income tax allowance was raised to £10,500 and the 40% threshold raised slightly. Supposedly everyone earning less than £100K will see an increase in their take-home pay in April.

There was a slew of measures on the savings front. Cash and equity ISAs are to be merged into New ISAs. (George missed the obvious PR coup of calling them NISAs!) The contribution allowance is raised to £15,000 per year, but starting on 1st July for some reason.

The ISA changes are going to give the savings industry a few headaches. The merging of the types means that the great mass of people who only started a cash ISA now also have an equity ISA. ISAs have morphed into the old Personal Equity Plan - PEPs - introduced under Thatcher and cancelled by Blair.

Unfortunately the ISA rates have crashed recently. You'll be lucky to beat 2%.

The amount you can put into premium bonds has gone up from £30K to £40K and the number of millionaires "created" per month is increasing from 2 to 4. "Milly", who visits each new millionaire personally to tell them, and applies CPR if needed, has had her work load doubled. (I'm not quite sure why the million pound cheque needs to be delivered by a medically trained person but you can win a hundred million on the Eurolotto and you have to phone them.)

There are some new "pensioner bonds" which pay 4% - the limits are low, no-one will be making much here.

There are also big changes in person pensions. The requirement to buy an annuity is completely removed; which is excellent because annuities are terrible value for money at the moment. Recently retired people must be gritting their teeth that they have had to hand over their pension "pots" and now no-one has to. We may even see a movement started to get them their money back.

There were some other changes to private pensions which could in the long term be quite significant. Basically from the age of 55 you can withdraw cash from your pension at your marginal rate of taxation, previously you paid 55% if you wanted your money back in cash form. (There were allowances for small amounts though.) This is complex. Details here. It could be that some interesting tax dodges will become possible. The ramifications of the pension changes will not be apparent for some time to come.

The chancellor also mooted a couple of other big ideas. He wants a cap on welfare spending. He wants it limited to inflation so that the welfare budget cannot run out of control in the future. He also wants some sort of limit on government borrowing. These proposals are not fleshed out at the moment, but we could be seeing the birth of an American style "debt ceiling".

Locking in fiscal prudence is a good idea. In the past we have generally seen the Tories being careful with the money then Labour coming into power and spending like mad until the coffers are empty and the Tories are re-elected to fill them again. Breaking this cycle would be a boon to the country.

Milliband responded for the opposition (for some reason he responds to the budget but Balls responds to the Autumn Statement.) He made the good and valid point that despite all the good economic news people's living standards have been continually falling during this government's period in office. He winged again about the millionaire tax rate being reduced from 50% to 45% but since it was 40% when he was in government, and he never even taxed private jets, this point is starting to fall flat.

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