Wednesday, 8 July 2015

Budget July 2015

George Osborne has just had his second bite of the cherry this year by delivering another budget. In five or six months he will deliver an Autumn statement and then in 8 months another budget - his Christmases are coming thick and fast.

Osborne was in triumphal mood. For the first the time he could do what he really wanted to do without the Lib Dems breathing down his neck and nixing all his ideas. And it turns out what he has really wanted to do all along is cut spending and cut taxes.

He plans to get overall spending down £37bn over the course of this parliament, starting with a £12bn cut in welfare this year. The knife is going into working tax credits (WTC) which apparently costs us £30bn a year. People earning more than £23K (London) or £20K (everywhere else) will no longer qualify for most benefits, especially WTC and Universal Credit (UC). For "new" children only the first two children will attract these benefits, although all still get child benefit (CB). There will be an exemption for twins. WTC will also be tapered earlier and faster as income increases - as soon as someone earns £3K per year the benefit will tail off at 48% of the amount earned.

Good and bad news for residents in social housing: rents are going down by 1%, unless they earn £40K pa (London) or £30K pa (rest of country) in which case they will be paying full commercial rates instead. The effect of this policy in Central London will be extreme - full commercial rate for a Central London flat is likely to be far more than £40K per year.

The chancellor also had a dip into motorists' pockets. New low emission cars which hitherto were taxed (VED) at a low rate because of their greenness will henceforth be taxed quite a bit more - standard rate to be £140 per year. There is also a low rate and a premium rate - the chancellor forgot to say what they will be charged. On the plus side he is looking at exempting new cars from MOTs for the first four years instead of the current three and all the new money raised will be earmarked for roads, not general spending.

On the income tax side the personal allowance will be rising to £11K this year, and the "pledge" is to increase the 40% band threshold to £50K, but only by 2020 - next year it will be £43K.

Non-doms got hit. Anyone resident in the UK for 15 or more of the last 20 years loses his non-dom status. Some non-doms were born non-dom and have never lived outside the UK so this could be a shock to the system. Non-doms are only taxed on income as they bring it into the UK, anything earned abroad is not taxed. The question not answered by the chancellor is can they now bring their entire fortune into the UK without paying tax on it? They would love it if yes. Probably the rules will be less generous than that. Probably they will stay non-dom for existing money but be "dom" for new money. Remains to be seen if all those Russian billionaires decide to up-sticks and leave.

Defence and security spending will be increased and there was a lot of talk of the "Northern Powerhouse" with a bung to Manchester and mooting of bungs to Sheffield and Leeds if they get their acts together.

The housing market is due a little shake up. Buy-to-let tax relief on mortgage interest is being restricted to 20% with a view to abolishing it altogether eventually. Would-be owner-occupier buyers have long complained that BTL landlords can out bid them because the BTL buyer gets tax reliefs that the OO does not; looks like the playing field is being levelled, and not before time.

In a very complicated way houses valued up to one million pounds are being taken out of inheritance tax. Why it's so complicated is not clear, but the deal is good, this is a generous give-away.

For businesses corporation tax is being reduced from 20% to 19% in 2019 and 18% in 2020. There is also going to be a £5K tax free allowance for dividend payments (nice!)

Anyway let us compare with last year (not the March this year budget since that was just for laughs)...

Spending....

                    2014        2015
Welfare            £231bn      £222bn
Social services    £ 31bn      £ 30bn
NHS                £140bn      £141bn
Transport          £ 23bn      £ 28bn
Education          £ 98bn      £ 99bn
Defence            £ 38bn      £ 45bn
DTI                £ 17bn      £ 24bn
Housing, environ   £ 25bn      £ 28bn
Police, intel      £ 32bn      £ 34bn
Debt interest      £ 53bn      £ 36bn
Other              £ 53bn      £ 48bn

Total spend        £732bn      £742bn

Taxes...

Income tax         £167bn      £170bn
National insur     £110bn      £115bn
Excise duties      £ 47bn      £ 47bn
VAT                £111bn      £133bn
Business rates     £ 27bn      £ 28bn
Council tax        £ 27bn      £ 28bn
Other              £118bn      £109bn

Total receipts     £648bn      £673bn

Total borrow       £ 84bn      £ 69bn


So planned borrowing is down and GO intends to keep it on a downward track until 2019/2020 when no more borrowing will be required and a surplus of around £10bn is expected. He is so keen on this that there will be legislation called the "Fiscal charter" which will make it illegal for any future government to increase the national debt unless GDP falls below 1%, in which case they are allowed to do some "counter-cyclical"  borrow-and-spend to stimulate the economy.

Fuel duty is frozen, and there was no mention at all of the usual budget staples of beer, spirits and fags.

Osborne's big finale was a "national living wage" which is like a national minimum wage only higher. He's going to phase it in up to £9 per hour in London eventually. This is intended to remove the effective subsidy that large businesses with a lot of low paid staff get from the government, eg the supermarkets. The reduction in WTC combined with the NLW should mean few people get in-work benefits.

Harriet Harperson then rose to respond on behalf of the leaderless Labour party. She noted that productivity in the UK was 30% down on that in France, Germany and the USA and Osborne hadn't done what it would take to fix this (open the doors to undocumented migrant workers earning less than legal minimum?)

She also objected to the politicization of the budget. And to be fair, she was right. Towards the end GO was crowing about Conservatives doing this, Conservatives doing that, all quite inappropriate for a "Government" announcement. She alluded to GO's ambitions to become prime minister when Cameron quits in four year's time.

Next spoke Andrew Tyrie, very long standing chairman of the Treasury Select Committee, and voice of reason. He noted that a "Grexit" would cause bond yields to rise, the Chinese equity collapse (30% down over the last couple of weeks) could require interest rates to rise, and the £375bn QE would have to be unwound at some point. GO was probably hoping everyone would forget he and his predecessors have printed all that money and just let him write it off. No such luck with eagle-eyed Tyrie.

And that sums up this year's second budget. All in all, quite a good budget, constraining spending and bringing down borrowing. Could have done with some decent tax cuts, but that probably won't be happening for five years, even if everything goes according to plan, which it usually does not.

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