The Chancellor, George Osborne, unveiled tax breaks for beer drinkers, drivers and first time buyers in today’s Budget; but he admitted the economy is still struggling. He told the House of Commons that growth for the current year had been cut in half to 0.6%, down from the previous forecast of 1.2%. Next year is expected to remain, with the economy expected to grow by 1.8% instead of the 2% predicted just three months ago.
Mr Osborne said that the Office for Budget Responsibility (OBR) now predicts growth of 2.3% for 2015, 2.7% in 2016 and 2.8% in 2017. It confirmed that the Government is on course to meet its fiscal mandate a year early. However, it reported that public sector net debt would rise from 75.9% of GDP this year, peaking at 85.6% in 2016/17 before starting to fall back thereafter.
The OBR’s figures show that the deficit has fallen from 11.2% of GDP in 2009/10 to 7.4% this year and is set to continue dropping until it reaches 2.2% in 2017/18. They also indicate that borrowing should fall from £108bn next year to £97bn in 2014/15, and then £87bn, £61bn and £42bn in the following years.
The Chancellor blamed the down turn in economic growth to the crisis in the eurozone, which has now been gripped by a new crisis in Cyprus over a €17bn bailout. Cyprus, he said, was “further evidence that the crisis is not over and the situation remains very worrying. I will be straight with the country – another bout of economic storms in the eurozone would hit Britain’s economic fortunes hard,” adding that the OBR now expected the eurozone to show no growth this year.
There had been growing calls for the Coalition to change course from the present austerity regime. But Mr Osborne insisted there could be no turning back as he outlined his “Budget for an aspiration nation”. “It is taking longer than anyone hoped,” he told the House, adding that the country had to “hold to the right track.” This Budget, he said, was a package for “people who aspire to work hard and get on” but conceded the climate was still “difficult”.
He introduced measures design to ease the bitter pill. For instance, he announced that no-one will pay income tax on the first £10,000 they earn, a key stated aim of the coalition, with the policy being introduced a year ahead of schedule. Working parents will get help from the new tax-free childcare support; pensioners should benefit from the introduction of the flat rate pension by 2016. And small businesses in particular will benefit from a new employment allowance designed to save employers £2,000 on their National Insurance bills.
He announced plans for cuts of a further £2.5bn in government spending over the next two years, all designed to redirect money into capital spending projects. There will be yet more cuts in spending review for 2015/16, which he said would rise from £10bn to £11.5bn. Part of this will come from the extension of the 1% cap in public sector pay through to 2015/16, something which has angered some civil servants enough for them so staged a 24-hour strike.
However, although these cuts are also expected to affect Scotland, the Treasury says that this will be considerably less than that imposed on Whitehall departments. It points out that the Scottish Government will get an extra £176m over the next two years. Although Holyrood will see its day-to-day spending cut by £103m, the changes announced this afternoon will see a £279m increase in capital investment.
Mr Osborne used the Budget speech to set out a new remit for the monetary policy committee of the Bank of England. This is currently focused only on inflation but will now adopt an approach more in line with the Federal Reserve in the US which also takes employment into account when deciding on interest rates. The chancellor said that the new approach had been discussed both with outgoing Bank of England governor, Sir Mervyn King, and his successor, the Canadian Mark Carney who takes over later this year.
He promised to cut corporation tax to 20% in April 2015 to show Britain was “open for business”; and he pledged to crack down on tax avoidance. His plans include the use of the General Anti Avoidance Rule which comes into force later this year and which would be accompanied by a “name and shame” regime targeted at aggressive tax planners. He added that recent tax disclosure deals with Jersey, Guernsey and the Isle of Man would deliver more than £1bn in unpaid taxes; and he argued that further measures would take savings from anti-avoidance measures to more than £3bn.
In his first comment on the UK Budget, Scottish Finance Secretary John Swinney said that the Chancellor “should have offered a decisive injection of new capital to fuel economic recovery. He has however cut the hard cash the Scottish Government has available to spend and applied a “straight-jacket” of loan and equity facilities over which the Scottish Government will have no discretion and which will have to be repaid at a later date.
“George Osborne has finally had to admit that his fiscal austerity does not work but instead of taking immediate action to support capital spending, the Chancellor’s plans announced today postpone further investment in infrastructure to 2015-2016. There are already concerns that his small beer budget will cost Scotland’s whisky industry,with warnings over future investment.”
The Scotch Whisky Association had called for the duty “escalator” on alcohol to be scrapped. They will be disappointed that the Chancellor has only done this for beer — the increases for wines and spirits will carry on. However, his decision for further cut beer duty by 1p will be welcome news to many breweries in Scotland, given the rising number of independent micro-breweries here.
In the first Scottish business reaction to the Budget, the Scottish Building Federation welcomed plans to target additional funding towards shovel-ready construction projects. Its Executive Director, Michael Levack, said that the “commitment to prioritise an additional £300 million towards capital investment in Scotland is welcome. But considering that Scottish construction output fell by more than £1.1 billion last year alone, it is clear that more could and should be done to support the industry.” He added that the Chancellor had “missed a golden opportunity to stimulate investment in initiatives to make our built environment greener and more energy efficient.”
However, Ed Monaghan, chief executive of the Scottish construction company Mactaggart & Mickel Group, thought that the English housebuilding industry would be “somewhat buoyed by the Chancellor’s measures to boost new home sales and we would call on the Scottish Government to take heed and replicate these measures north of the border. The possible extension of the Funding for Lending Scheme is good news for the sector, having already driven down mortgage rates to record lows it should further stimulate demand.”
In a preliminary response to the Budget, CBI Scotland’s assistant director, David Lonsdale (left), said that the Chancellor was “right to continue the path towards balancing the government’s books and beginning to pay down the ballooning national debt, which is expected to swell by a further £290 billion over the next three years. The Budget contains a number of solid growth-enhancing measures, particularly the shift of monies from current to capital expenditure.”
Colin Borland, the Federation of Small Businesses’ (FSB) head of external affairs in Scotland, thought that many of the measures the Chancellor outlined “show that he understands the potential of the UK’s smallest businesses. The Chancellor’s decision to help the smallest employers, and prospective employers, should not only benefit these businesses but will give a welcome boost to the Scottish job market in 2014. Scottish firms will also be thankful that the fuel duty increase proposed for September has been cancelled. We hope that the movement on Corporation Tax results in some supply chain benefits for the country’s smaller firms. Similarly, Scottish infrastructure spending must result in work going to Scottish small businesses.”
By contrast, Grahame Smith, STUC General Secretary, believed that the extent of the Coalition’s failure is “laid bare by today’s statement. While the STUC had called for a major programme of infrastructure investment to get the economy moving, the measures announced today by the Chancellor are wholly insufficient. Funding this investment through additional spending cuts dilutes any stimulatory effect and the programme is in any case much too small.
“There was nothing of value in this Budget to address the living standards crisis. Consistently focusing on raising the tax threshold is not a credible way of addressing inequality and falling real incomes. This expensive measure ignores the very poorest who don’t pay tax and benefits most those in the upper half of the income distribution.”
Graeme Brown (right), the Director of Shelter Scotland, expressed his disappointment that “the Chancellor did not take this opportunity to scrap the ill-conceived Bedroom Tax and whilst any new investment in social housing is welcome, today’s Budget falls well short of the 100,000 homes proposed by the CBI and British Chambers of Commerce. Scotland should see some additional investment following today’s Budget and we now call on the Scottish Government to use all of this extra money to invest in a major housing programme and build at least 10,000 new social homes a year to end Scotland’s housing crisis for good.”