17 March 2015

UK Budget 2015: What to look out for


It is George Osborne’s sixth Budget today and there is a good chance it will be his last – even if the Conservatives return to government after the General Election the Foreign Office might beckon within the year. What should we expect and what should we look out for?

First, expect plenty of talk about growth and jobs relative to our European partners. In 2010 the UK could easily have gone the way Ireland and Spain did – dragged down by their banking sectors. Or an inadequate deficit reduction plan could have forced the UK into the sort of humiliating u-turn President Hollande made in France. Even friendly commentators on Osborne’s deficit reduction programme expected it to accompany a large rise in unemployment. But none of those things happened. Don’t expect Osborne to let us forget it. He may refer to how the experience of Greece illustrates how important it is for a government to keep control of its own destiny in budgetary terms. He may also emphasize that the Eurozone economic situation remains very uncertain – the UK government has (alone in the EU) acknowledged having formal discussions about the implications of Greek euro exit and the chances of Greece leaving the euro remain significant. He might invite us to consider whether we would Labour in charge if economic turbulence in the Eurozone returned.

Through the early part of this Parliament growth forecasts kept being cut, making it harder to meet the original deficit reduction targets. Next Parliament we may well see precisely the opposite with growth upgrades making things easier. Look out for what the OBR says on growth. Any numbers consistently above 2.3% and Osborne’s task will be transformed from grim to grin. Probably, though, this time they will stay relatively unchanged. The big upgrades may come in the next couple of years.

Deficit reduction has been slower than expected this Parliament as initially slow growth meant weak tax receipts. Look out for the year surpluses are expected to start. It’ll probably be 2018 and there is a good chance Osborne will legislate to force a surplus that year. That would mean an incoming minority Lab-Lib-Green administration could only deviate from Osborne’s plan today if they can get a majority to vote to reverse it – which they won’t have. With opinion polls suggesting no party or plausible coalition is likely to get a majority look out for other such “bake it into the cake” fiscal legislation – e.g. perhaps something on the total benefits bill falling by some date next Parliament as well.

If he hasn’t quite abandoned hope of a majority yet, expect Osborne’s various minor spending pledges to take him to just above Gordon Brown’s 1999 spending trough (35.9%) in 2019 – depriving Labour of its claim that the Conservatives are taking us back to the 1930s.

Some such spending may come in the form of extra infrastructure grants to devolved authorities in London and Manchester, though something that benefits Scotland might not be a surprise either.

Another way to avoid spending falling below Brown’s threshold without deficit reduction going off track, and damaging the “much left to do – don’t let Labour ruin it”, narrative would be to find some extra tax. Three tax rise areas are particularly likely. First a “Google tax” on multinationals that try to locate activities tax-efficiently. Second restriction of pension tax relief to £1m or perhaps a little higher. Third he will probably announce a levy on the profits of the tobacco sector.

Some of these tax rises will go to pay for tax cuts such as a rise in personal income tax allowances to £11,000 and some cuts to corporation tax and perhaps savings taxes. Whilst he’s on the topic of personal taxes he’ll probably also announce the end of end-of-year tax returns to be replaced by a new online return. Expect to hear analysis of how much after-tax pay for those in employment towards the bottom of the income distribution has risen this Parliament, defusing Labour’s contention that the poor have not benefitted from the recovery.

The transformation of pensions (in practice, the abolition in their traditional form) has been a central theme of the Osborne’s latter budgets — showing he hadn’t run out of steam or ideas. Expect further steps in the de facto abolition of pensions with those already in annuities permitted to buy their way out.

I would expect some retrospection over what has been achieved this Parliament and some consideration of the task yet to come. The key goals of the 2010 deficit reduction programme were: (a) to deliver sufficient medium-term nominal growth that the UK’s banks would not go bust, dragging down the sovereign as happened subsequently in Spain and Ireland (illustrating that this was very much a genuine risk) – in my view the jury remains out on whether this has really been achieved and we will not know the answer until interest rates return to more normal 3%-5% levels; (b) to prevent bond markets from losing confidence in UK government bonds creating the sorts of yield spikes we saw in Greece, Italy, Portugal and, to a lesser extent, France – Osborne has been largely successful in this, though the UK did lose its AAA rating; (c) to keep the UK government in charge of events instead of us appealing to the IMF (as some Labour figures said we should volunteer to do in 2010) or EU – on this Osborne has been totally successful.

Perhaps the greatest triumph of this government is that when protesters yell “Cuts! Cuts! Cuts!” in Britain they hold placards of Cameron and Clegg and Osborne, not Angela Merkel or Christine Lagarde. Osborne may struggle to say quite this, explicitly. But he will want to say that this Parliament Britain has borne some pain, and that he knows that it hurt, but that (quibbles aside) it has worked. He will want us to remember that he did that, when all around him there was pressure to give way and switch to Plan B, and that Ed Balls would not have done that.

History will judge George Osborne’s 2010-2015 Chancellorship. He cannot really judge himself – for all that he may try to do so at least a bit, today. But I would expect History to be very complimentary to him indeed.

Andrew Lilico is Chairman of Europe Economics.