The Budget - steady on course for infrastructure investment
Politically and practically, this year’s Budget was a mildly inconvenient diversion from the real business of the Government, which currently is to prepare for the EU referendum. Still, the Chancellor of the Exchequer did his duty and produced a Budget which will have relatively limited impact.
The important outcome of this Budget was further confirmation – if it were actually needed – that the Government is committed to delivering or enabling a long term programme of infrastructure investment. The Chancellor announced almost casually the Government’s intention to allow Crossrail 2 and HS3.
Here are the key points:
- The green light to High Speed 3 between Manchester and Leeds; a 4-lane M62; and will develop the case for a new tunnelled road from Manchester to Sheffield. Upgrade the A66 and A69 too.
- Accepting the Infrastructure Commission’s recommendations on energy and on London transport.
- Will now commission Crossrail 2.
- £730 million in further auctions to back renewable technologies. Inviting bids to help develop the next generation of small modular reactors.
- £700m increase in flood defences will be paid for by a rise in the standard rate of Insurance Premium Tax by half a percentage point.
Growth and inflation forecasts
- The OBR have revised down growth in the world economy and in world trade. In their words, the outlook is “materially weaker”. They point to the turbulence in financial markets, slower growth in emerging economies like China, and weak growth across the developed world.
- Last year, GDP grew by 2.2%. The OBR now forecast it will grow by 2% this year, then 2.2% again in 2017, and then 2.1% in each of the three years after that.
- The OBR forecasts inflation at 0.7% this year and 1.6% next year.
- The remit for the Monetary Policy Committee remains the symmetric CPI inflation target of 2%.
Public spending and borrowing
- The share of national income taken by the state has decreased from 45% in 2010 to 40% today. Spending plans in this Parliament will see it fall to 36.9% by 2020. The country will be spending no more than the country raises in taxes. In the future, debt falls to 82.6% next year, then 81.3% in 2017-18, then 79.9% the year after. In 2019-20, it falls again to 77.2%, then down again the year after to 74.7%.
- The deficit is forecast to fall next year to 2.9%. In 2017-18, it falls to 1.9%. Then it falls again to 1.0% in 2018-19.
- Borrowing continues to fall to £55.5 billion next year, £38.8 billion the year after that and £21.4 billion in 2018-19. In 2019-20 Britain is set to have a surplus of £10.4 billion. The surplus is then set to rise to £11.0 billion the year after. That’s 0.5% of GDP in both years.
- Further steps to stop tax evasion, prevent tax avoidance and tackle imbalances in the system will raise £12 billion over this Parliament.
- Some multinationals deliberately over-borrow in the UK to fund activities abroad, and then deduct the interest bills against their UK profits. So from April next year Government will restrict interest deductibility for the largest companies at 30% of UK earnings, while making sure firms whose activities justify higher borrowing are protected with a group ratio rule.
- The Government is setting new hybrid mismatch rules to stop the complex structures that allow some multinationals to avoid paying any tax anywhere, or to deduct the same expenses in more than one country. They will strengthen the withholding tax on the royalty payments that allow some firms to shift money to tax havens. They will restrict the maximum amount of profits that can be offset using past losses to 50%. This will only apply to the less than 1% of firms making profits over £5m – and the existing rules for historic losses in the banking sector will be tightened to 25%. They will maintain their plans to align tax payment dates for the largest companies more closely to when profits are earned, but will give firms longer to adjust to these changes which will now come into effect in April 2019. (This has a material effect on the Chancellor’s ability to achieve a budget surplus in 2019-20).
- Reforms to corporation tax will raise £9 billion in extra revenue. By April 2020 it will fall to 17%.
- The new threshold for small business rate relief will raise from £6,000 to a maximum threshold of £15,000.
- The threshold for the higher rate will rise from £18,000 to £51,000.
- Commercial stamp duty will have a zero rate band on purchases up to £150,000; a 2% rate on the next £100,000; and a 5% top rate above £250,000. There will also be a new 2% rate for those high value leases with a net present value above £5 million. This will raise £500 million a year.
- The Carbon Reduction Commitment will be abolished. The Climate Change Levy will rise from 2019. The most energy intensive industries like steel remain completely protected.
- The Supplementary Charge on oil and gas will be cut from 20% to 10% and the Petroleum Revenue Tax effectively abolished.
- The Government will introduce a new sugar levy on the soft drinks industry in two years’ time. It will be assessed on the volume of the sugar-sweetened drinks they produce or import. The OBR estimate that this levy will raise £520 million. The money will be used to double the funding of primary school sport and to fund longer school days for those secondary schools that want to offer their pupils a wider range of activities, including extra sport.
- Fuel duty will be frozen for the sixth year in a row.
- The headline rate of Capital Gains Tax will be reduced from 28% to 20%.
- Capital Gains Tax paid by basic rate taxpayers will be reduced from 18% to10%.
- From April 2017, the ISA limit will be increased from just over £15,000 to £20,000 a year.
- From April 2017, anyone under the age of 40 will be able to open a Lifetime ISA and save up to £4,000 each year. And for every £4 you save, the government will give you £1 each year until you are 50.
- From April 2017, the tax-free personal allowance will be £11,500 and the Higher Rate threshold will be £45,000.
- The Government is opening negotiations on a city deal with Edinburgh; and backs the new V&A in Dundee. It is providing community facilities for people in Helensburgh and the Royal Navy personnel at Faslane.
- In Wales, the Government is devolving new powers to the Assembly and has signed a new billion pound deal for the Cardiff region. They are opening discussions on a city deal for Swansea and a growth deal for North Wales, so it’s better connected to the Northern Powerhouse.
- The Government will transfer new powers over the criminal justice system to Greater Manchester. They have reached agreement to establish combined mayoral authorities in East Anglia, the West of England and Greater Lincolnshire.
- By 2020, 100% of local government resources will come from local government.
- The Greater London Authority will move towards full retention of its business rates from next April.
- Michael Heseltine will lead a Thames Estuary Growth Commission and will report next year.
- By 2020 every primary and secondary school in England will be, or be in the process of becoming, an academy.
- The Government is going to look at teaching maths to 18 for all pupils.
- The Government is publishing a White Paper on 17 March 2016 on improvements to the quality of education.
Further information from Julian Smith, head of external affairs at APM (email@example.com). Please follow him on Twitter @apm_xa.